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Risk Incentives, relationship-lending, and innovation: the role of CEO culture in the banking landscape

Risk Incentives, relationship-lending, and innovation: the role of CEO culture in the banking landscape
Risk Incentives, relationship-lending, and innovation: the role of CEO culture in the banking landscape
This thesis focuses on the importance of culture, specifically the bank Chief Executive Officer (CEO) cultural heritage, in the banking landscape. To this end, we bring to the forefront three different elements to understand how they are influenced by culture. We begin with an investigation on how the cultural heritage of a bank CEO influences the relationship between compensation risk-taking incentives and bank risk. Second, we extend our analysis to incorporate loan-level data. We explore how bank CEOs' cultural heritage shapes the nexus between lending relationships and the cost of bank loans in the syndicated loan market. Finally, we examine the impact of CEOs' cultural heritage on the cost of bank loans to innovative firms.
Our research is centred on the U.S. due to its multiculturalism deriving from historical waves of immigration, and quality of data available hence, exploit the cultural diversity in U.S. bank CEOs between 1992–2017. We focus on the CEO of the lead bank as they are considered the most senior executives within the organisation and have substantial influence over strategy, decision-making and outcomes. Our investigation consists of a variety of econometric tools to conduct our empirical analysis. We provide robust evidence for the aforementioned research areas. First, we find that the risk-taking compensation incentive vega, has a negative association with bank risk however, this association is influenced by the bank CEOs’ cultural heritage, namely the cultural dimension of masculinity. Second, we show that banks led by CEOs that trace their origin in more individualistic and masculine societies are less inclined to share with their borrowers the savings stemming from strong lending relationships. In contrast, banks led by CEOs that originate from societies where uncertainty avoidance and power distance are higher, exhibit a stronger propensity to reward their relationship borrowers with lower loan prices. Third, we provide evidence to show that bank CEO cultural heritage conditions the relationship between the cost of bank loans and innovative firms. Our most compelling results are from banks led by CEOs that trace their origin in more power distant, and uncertainty avoidant societies. Such CEOs are more inclined to reduce the cost of borrowing to innovative iii firms. In contrast, banks led by CEOs that originate from individualistic societies are less likely to value innovation and more likely to exploit the borrowing firm by charging higher loan costs. In addition to statistical significance, our results provide economic significance when translated into monetary terms.
These findings are consistent with the view that certain cultural attributes affect the degree to which risk-taking compensation incentives, lending relationships, and borrower innovation are valued in the societal and business contexts. Whilst economists have previously been hesitant to rely on culture as a possible determining factor of economic outcomes, we now possess the tools to quantify previously immeasurable social dynamics, values, and characteristics due to the improvement of data collection and methodologies. The contribution of this thesis is to explore traditional issues in finance such as compensation practices, relationship-lending, and borrower innovation under a new cultural lens.
University of Southampton
Christofi, Christine
634ec58a-dfb7-4089-ac46-f62e0e537248
Christofi, Christine
634ec58a-dfb7-4089-ac46-f62e0e537248
Wolfe, Simon
9a2367fc-36cc-496a-bbd2-e7346bcbb19e

Christofi, Christine (2021) Risk Incentives, relationship-lending, and innovation: the role of CEO culture in the banking landscape. University of Southampton, Doctoral Thesis, 255pp.

Record type: Thesis (Doctoral)

Abstract

This thesis focuses on the importance of culture, specifically the bank Chief Executive Officer (CEO) cultural heritage, in the banking landscape. To this end, we bring to the forefront three different elements to understand how they are influenced by culture. We begin with an investigation on how the cultural heritage of a bank CEO influences the relationship between compensation risk-taking incentives and bank risk. Second, we extend our analysis to incorporate loan-level data. We explore how bank CEOs' cultural heritage shapes the nexus between lending relationships and the cost of bank loans in the syndicated loan market. Finally, we examine the impact of CEOs' cultural heritage on the cost of bank loans to innovative firms.
Our research is centred on the U.S. due to its multiculturalism deriving from historical waves of immigration, and quality of data available hence, exploit the cultural diversity in U.S. bank CEOs between 1992–2017. We focus on the CEO of the lead bank as they are considered the most senior executives within the organisation and have substantial influence over strategy, decision-making and outcomes. Our investigation consists of a variety of econometric tools to conduct our empirical analysis. We provide robust evidence for the aforementioned research areas. First, we find that the risk-taking compensation incentive vega, has a negative association with bank risk however, this association is influenced by the bank CEOs’ cultural heritage, namely the cultural dimension of masculinity. Second, we show that banks led by CEOs that trace their origin in more individualistic and masculine societies are less inclined to share with their borrowers the savings stemming from strong lending relationships. In contrast, banks led by CEOs that originate from societies where uncertainty avoidance and power distance are higher, exhibit a stronger propensity to reward their relationship borrowers with lower loan prices. Third, we provide evidence to show that bank CEO cultural heritage conditions the relationship between the cost of bank loans and innovative firms. Our most compelling results are from banks led by CEOs that trace their origin in more power distant, and uncertainty avoidant societies. Such CEOs are more inclined to reduce the cost of borrowing to innovative iii firms. In contrast, banks led by CEOs that originate from individualistic societies are less likely to value innovation and more likely to exploit the borrowing firm by charging higher loan costs. In addition to statistical significance, our results provide economic significance when translated into monetary terms.
These findings are consistent with the view that certain cultural attributes affect the degree to which risk-taking compensation incentives, lending relationships, and borrower innovation are valued in the societal and business contexts. Whilst economists have previously been hesitant to rely on culture as a possible determining factor of economic outcomes, we now possess the tools to quantify previously immeasurable social dynamics, values, and characteristics due to the improvement of data collection and methodologies. The contribution of this thesis is to explore traditional issues in finance such as compensation practices, relationship-lending, and borrower innovation under a new cultural lens.

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Submitted date: August 2021

Identifiers

Local EPrints ID: 456814
URI: http://eprints.soton.ac.uk/id/eprint/456814
PURE UUID: b0034ba8-5bac-4926-8150-b5d82f865149
ORCID for Simon Wolfe: ORCID iD orcid.org/0000-0001-9815-9535

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Date deposited: 12 May 2022 16:31
Last modified: 23 Jul 2022 01:36

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Contributors

Author: Christine Christofi
Thesis advisor: Simon Wolfe ORCID iD

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