CEO power and risk taking: evidence from European banks mergers and acquisitions

Abstract

Purpose

This study investigates the relationship between CEO power and the risk profile (RP) of acquiring banks through mergers and acquisitions (M&A) transactions.

Design/methodology/approach

The analysis is based on 214 transactions between 2010 and 2022 involving European Union-based acquirers. To assess the impact of M&A on the acquiring bank’s RP, we compare changes in the acquirer’s RP to control banks. We use linear regression with two-stage least squares instrumental variables (2SLS-IV) to examine the effect of CEO power on changes in merger-related risk.

Findings

The findings suggest that CEO power reduces the RP of the acquiring bank. Specifically, CEOs who hold both the CEO and board chair positions tend to take fewer risks. Additionally, CEOs with high ownership, CEO pay and extensive experience (measured by tenure and acquisition experience) decrease the RP. However, prestige power is positively correlated with an increase in RPs.

Practical implications

This research examines CEO influence on bank risk post-mergers, providing insights into governance, risk and strategic choices. The findings can guide banks in CEO selection and governance to mitigate M&A risks, improving risk management and decision-making in the financial sector.

Originality/value

This study is the first empirical investigation introducing diverse executive power metrics to analyze the link between executive power and risk-taking in the European banking sector, with a specific emphasis on the impact on M&A as critical investment choices.

Citation

Sghaier, A. and Hamza, T. (2024), "CEO power and risk taking: evidence from European banks mergers and acquisitions", Journal of Strategy and Management, Vol. 17 No. 4, pp. 655-687. https://doi.org/10.1108/JSMA-05-2024-0098