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Overconfident CEO Influence on Bank Risk Taking Considering the Restraining Power of Board of Directors
Bank risk –taking behavior is of significant interest for researches and policy makers because financial failures due to excessive risk in this sector can have severe consequences both for numerous bank’s stakeholders and for macroeconomic system overall. Growing literature investigates the main factors contributing to “well above average” risk taking incentives on corporate governance level. Particularly this study attempts to explain the corporate decision-making regarding risk strategy from the ground of behavioral finance: taking into account bounded rationality of corporate governance agents. On a panel dataset of 110 listed US banks in the period of 2011-2016 empirical evidence is provided that excessive risk taking in banks arises from cognitive bias of overconfidence on CEO decision-making level. Moreover, study also aims to present how the impact of overconfident CEO on risk – taking is affected if considering the interaction of CEO overconfidence with another corporate governance characteristic, such as board of directors. It was revealed that the power of the CEO's positive influence on risks is moderated if the board is an effective monitoring mechanism due to the presence of more independent directors – experts in financial sphere.