Bank CEO Materialism, Corporate Culture and Risk

We examine the extent to which bank CEOs exert influence on the corporate cultures of banking organizations by investigating how the prevalence of materialistic bank CEOs has evolved over time, and how observed risk management policies, the behaviour of non-CEO executives and bank tail risk vary with bank CEO materialism. We document that between 1994 and 2004 the proportion of U.S. banks run by materialistic CEOs increased significantly in absolute terms and relative to non-financial firms, coinciding with significant bank deregulation. Using an index reflecting the strength of risk management functions (RMI), we find that RMI is significantly lower for banks with materialistic CEOs, significantly increases after a non-materialistic CEO replaces a materialistic CEO, and decreases after a materialistic CEO succeeds a non-materialistic one. We also provide evidence consistent with non-CEO executives in banks with materialistic CEOs more aggressively exploiting inside trading opportunities around government intervention during the financial crisis. Finally, we find that banks with materialistic CEOs have significantly more downside tail risk relative to banks with non-materialistic CEOs, where the difference between groups increased significantly during the recent crisis.