Abstract
Why do firms take excessive risks that result in failure? Moral hazard theorists argue that the answer lies in the risk-boosting effects of the government safety net, which insulates firms from market discipline. We revisit this conventional wisdom by examining how exposure to government protection has contributed to recent trends in bank risk-taking in the USA. Drawing from insights from economic sociology, we highlight an additional way that exposure to government protection can shape organizational behavior: by reducing resource-based profitability pressures that can spur risky behavior. Using panel data analysis of risky US bank behavior between 1994 and 2015, we find that bank exposure to government protection was more often associated with less risk-taking than more of it. This pattern contradicts the predictions of moral hazard theory but aligns with the predictions of our own institutional-resource theory. We discuss implications for economic sociology and financial economics.
Talk to us
Join us for a 30 min session where you can share your feedback and ask us any queries you have
Schedule a callDisclaimer: All third-party content on this website/platform is and will remain the property of their respective owners and is provided on "as is" basis without any warranties, express or implied. Use of third-party content does not indicate any affiliation, sponsorship with or endorsement by them. Any references to third-party content is to identify the corresponding services and shall be considered fair use under The CopyrightLaw.
