Date of Award

Spring 1-1-2011

Document Type


Degree Name

Doctor of Philosophy (PhD)



First Advisor

Sanjai Bhagat

Second Advisor

Michael Stutzer

Third Advisor

Martin Boileau


We investigate the link between firm size and risk-taking among financial institutions during the period of 1998—2008 and make four contributions. First, size is positively correlated with risk-taking measures even when controlling for other observable firm characteristics, such as market-to-book asset ratio, corporate governance, and ownership structure. This is consistent with the notion that “too-big-to-fail” policies distort the risk incentives of financial institutions. Second, a simple decomposition of the risk measure, the Z-score, reveals that financial firms engage in excessive risk-taking mainly through leverage. Third, we find that the recently developed governance variable, measured as the median director dollar stockholding, has a substantial impact on reducing firms’ risk-taking. Lastly, investment banks are generally riskier than commercial banks. These findings suggest that rather than capping the firm size, it is more effective for policymakers to control a financial firm’s risk-taking by strengthening regulations on capital requirement; they also provide justification for the functional separation of investment banking from wholesale financial services. In terms of corporate risk management policy, these findings suggest that the excessive risk-taking problem can potentially be attenuated by focusing on the governance structure.