Imprinting Risky Behavior: The Institutional Origins of Bank CEO Risk-Taking

Abstract

Commercial banks in the United States have taken on more risk since the 1980s, in line with a shift in the dominant business model in the field, from one emphasizing financial stability to one promoting greater risk-taking to maximize shareholder value. But why did certain banks embrace risky strategies more actively than others? Combining insights from the upper echelons perspective and imprinting theory, we argue that bank CEOs who absorbed the principles of shareholder value maximization through MBA education and started their banking career in the post-deregulation era pursued risk-taking more aggressively than other CEOs. We test this argument using data on 194 large commercial banks from 1993 to 2015. Our analysis shows that CEOs with an MBA who entered banking after the mid-1980s were heavier users of brokered deposits—a riskier funding source that contributed to bank instability during the 2007-2009 credit crisis. They also contributed to the use of brokered deposits indirectly by promoting shareholder-value prescriptions known to boost incentives for managerial risk-taking. By highlighting the role that organizational decision-makers—and their institutionally-embedded cognitive orientations—play in driving the uptake of risky strategies, our study contributes to the literatures on corporate risk-taking and institutional change.