Shareholder control and financial distress in the thrift industry

Abstract

The shareholder-manager of a corporation maintains dual roles. As a manager, he strives to maximize the value of his salary of firm-specific human capital; as a shareholder, he strives to maximize equity value. These objectives often conflict. The S&L manager may increase the value of his shareholdings by increasing the risk and “option value” of his employer; however, this behavior will decrease his job security. Thus, one might expect the managerial team with higher shareholdings to act more on behalf of shareholders and assume higher levels of risk. This article is concerned with wether managerial risk-taking behavior and financial distress in the thrift industry in the period June 1987 to March 1991 may be linked to levels of managerial shareholdings.