An empirical analysis of the relation between bank charter value and risk taking

This paper examines the relation between bank charter value and risk taking. Using a sample of U.S. banks over the period 1990–2006, we find that the relation is U-shaped: as charter value increases, risk taking first decreases and then increases. This finding is robust across alternative measures of risk taking and an estimation method that accounts for the joint determination of charter value and risk taking.

► This paper examines the relation between bank charter value and risk taking.
► Five measures of risk taking are employed: total risk, systematic risk, firm specific risk, the ratio of nonperforming loans to total loans, and Z-score.
► The two-step system GMM estimator is used.
► A U-shaped relation between charter value and risk taking is obtained.