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Effects of CEO Turnover in Banks: Evidence Using Exogenous Turnovers in Indian Banks

Published online by Cambridge University Press:  05 November 2018

Arkodipta Sarkar ,
Krishnamurthy Subramanian  and
Prasanna Tantri
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Abstract

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We examine the effects of chief executive officer (CEO) turnover in banks. Incoming bank CEOs face problems of information asymmetry because banks’ operations are opaque and bank risk can change dramatically in a short time. These CEOs may therefore change bank policies to manage their personal risks. Since CEO turnover is usually endogenous, we utilize a setting in which CEO turnover is based solely on retirement age and is thus exogenous to bank performance. Consistent with our thesis, incoming CEOs increase provisioning for future delinquencies and shrink lending. Bank stock prices decline following these changes. Politically motivated lending or ever-greening cannot explain our results.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 1 , February 2019 , pp. 183 - 214
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

Footnotes

1

We thank Paul Malatesta (the editor) and an anonymous referee for their suggestions. We thank Viral Acharya, Sumit Agarwal, Yakov Amihud, Tarun Chordia, Jeffrey Coles, Vidhan Goyal, Sanjay Kallapur, Luc Laeven, Hariom Manchiraju, Danny Miller, Deepak Mohanty (executive director, Reserve Bank of India), Randall Morck, Urjit Patel (governor, Reserve Bank of India), Raghuram Rajan (former governor, Reserve Bank of India), Lakshmanan Shivakumar, Anand Srinivasan, K R Subramanyam, and all the participants of seminars/conferences at the Indian School of Business, Reserve Bank of India, Asian Bureau for Financial and Economics Research, and Midwest Finance Association for helpful comments and suggestions. We also thank the Indian School of Business Center for Analytical Finance for providing the data and the necessary financial assistance for this project. Subramanian thanks the Centre for Advanced Financial Research and Learning (CAFRAL) for research support. We thank Venkatesh Ramamoorthy for excellent research assistance. We also thank Sai Harsha Katuri, Mohan Ramanath, and Padma Priya for assistance with data collection. The usual disclaimer applies.

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