Risk diversification and corporate control

Abstract

This study empirically examines how the efficacy of managerial stock ownership in changing agency problem or principal-agent problem is affected by the degree of the bank's risk diversification of asset portfolios using the sample of Korean banking industry. Coefficient of determination (R2) of the market model regression, which is the empirical specification of the CAPM (capital asset pricing model), is used as the measure of bank's risk diversification of asset portfolios. We found that the banks with higher degree of risk diversification increased risk more significantly than the banks with lower risk diversification as managerial ownership increases. Thus, the efficacy of managerial ownership appeared to be greater for the banks with higher risk diversification. This study suggests that a closer and more frequent monitoring by bank regulator is needed for the banks that have increased managerial ownership or insider holdings to prevent banking industry from being excessively risky without profitability being improved. © Seok Weon Lee, 2013.