ABSTRACT
We test a sample of 3,586 banks from 33 European countries to determine whether performances above or below a social aspiration level (median performance of peer banks) influence banks’ aggregate risk levels. Our results are consistent with the behavioural theory of the firm and prospect theory in that we find that bank performance below a bank’s social aspiration level is followed by increased aggregate risk, i.e. risk-taking behaviour in the subsequent year. Although under-performing banks tend to be risk-takers, large banks and banks with high aggregate risk levels tend to limit the increase in their aggregate risk levels.
Acknowledgments
This work was supported by the Scientific Grant Agency VEGA under Grant 1/0402/15 and Slovak Research and Development Agency under Grant APVV-17-0155.
Disclosure statement
No potential conflict of interest was reported by the authors.
Notes
1 For an excellent review on risk-taking, see Hoskisson et al. (Citation2017). Please note the difference between risk aversion (general preference for safety and certainty over uncertainty) and loss aversion (a gain contributes less to utility/happiness than an equal loss subtracts from utility/happiness). In this paper we are working in the domain of risk aversion and its opposite – risk taking.
2 Andora (2), Austria (468), Belgium (19), Bulgaria (17), Switzerland (172), Cyprus (24), Czech Republic (21), Germany (1529), Denmark (60), Estonia (5), Spain (91), Finland (22), France (174), United Kingdom (100), Greece (7), Croatia (25), Hungary (18), Ireland (9), Island (4), Italy (466), Lithuania (5), Latvia (10), Luxemburg (37), Liechtenstein (2), Malta (7), Netherlands (17), Norway (110), Poland (31), Portugal (21), Romania (16), Sweden (76), Slovenia (10) and Slovakia (11).
3 Most often used firm-level aspiration; see Bromiley and Harris (Citation2014) for other aspiration measures.