Banks’ risk endogenous to strategic management choices

Delis, Manthos D. and Hasan, Iftekhar and Tsionas, Mike (2015) Banks’ risk endogenous to strategic management choices. British Journal of Management, 26 (4). pp. 637-656. ISSN 1045-3172

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Use of variability of profits and other accounting-based ratios in order to estimate a firm's risk of insolvency is a well-established concept in management and economics. We argue that these measures fail to approximate the true level of risk accurately because managers consider other strategic choices and goals when making risky decisions. Instead, we propose an econometric model that incorporates current and past strategic choices to estimate risk from the profit function. Specifically, we extend the well-established multiplicative error model to allow for the endogeneity of the uncertainty component. We demonstrate the power of the model using a large sample of US banks and show that our estimates predict the accelerated bank risk that led to the subprime crisis in 2007. Our measure of risk also predicts the probability of bank default both in the period of the default but also well in advance of this default and before conventional measures of bank risk.

Item Type:
Journal Article
Journal or Publication Title:
British Journal of Management
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This is the peer reviewed version of the following article: Delis, M. D., Hasan, I. and Tsionas, E. G. (2015), Banks’ Risk Endogenous to Strategic Management Choices. British Journal of Management, 26: 637–656. doi: 10.1111/1467-8551.12111 which has been published in final form at This article may be used for non-commercial purposes in accordance With Wiley Terms and Conditions for self-archiving.
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06 Jun 2016 08:18
Last Modified:
22 Nov 2022 01:57