Is managerial ability a moderator? The effect of credit risk and liquidity risk on the likelihood of bank default |
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| Institution: | 1. Higher Institute of Finance and Taxation Sousse, University of Sousse, Tunisia;2. Telfer School of Management, University of Ottawa, 55 Laurier E., Ottawa, Ontario, K1N 6N5, Canada;3. Sousse Higher Institute of Management, University of Sousse, Tunisia;1. Free University of Bozen-Bolzano, Faculty of Economics and Management, Piazza Università-Universitätsplatz, Piazza Università 1, 39100 Bozen-Bolzano, Italy;2. University of Málaga, Campus El Ejido s/n, 29071, Málaga, Spain;1. Cyprus University of Technology, Cyprus;2. Durham University Business School, UK;3. University of Central Lancashire, UK;4. Tel Aviv University, Israel;1. Department of Finance, College of Management, National Taiwan University, Taiwan;2. Fordham University, Bank of Finland, and University of Sydney, 45 Columbus Avenue, 5th Floor, New York, NY 10023, United States;3. College of Management, Yuan Ze University, Taiwan |
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| Abstract: | This study investigates the effect of credit and liquidity risks as well as the moderating role of managerial ability on the likelihood of European commercial bank default during the period 2006 to 2017. We employ data envelopment analysis and a tobit model to measure banks' efficiency, the z-score to measure the likelihood of their default, and perform endogeneity and model specification robustness tests. Our results reveal that both risks significantly affect the likelihood of bank default and that the high skill of managers does not attenuate this effect. Rather, in the case of credit risk, managerial ability extenuates this effect. Managerial overconfidence and narcissism may explain the latter result. Another plausible explanation is that highly skilled managers who are likely to be rewarded with performance-based compensation schemes may be incentivized to hide bad news for an extended period of time. Such a scenario would increase the likelihood of bank default. |
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