Date of Award

Summer 2012

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Program/Concentration

Business Administration-Strategic Management

Committee Director

Anil Nair

Committee Member

Michael McShane

Committee Member

David Selover

Abstract

This dissertation examines corporate risk-taking behavior by investment banks in the United States. This study was sparked by the collapse of Lehman Brothers, one of the largest bankruptcy filings in U.S. history. This dissertation examines the specific factors that drove investment banks such as Lehman Brothers to take excessive risks, and how the deregulation of the US financial services industry towards the end of the 1990s contributed to risk-taking behavior.

I use four theoretical perspectives to examine corporate risk-taking behavior among investment banks. These perspectives include: institutional theory, behavioral theory of the firm, knowledge based view (KBV) of the firm, and agency theory. Risk research in strategic management has mostly tended to adopt three theoretical perspectives: behavioral theory of the firm (Cyert & March, 1963), prospect theory (Kahneman & Tversky, 1979), and agency theory (Jensen & Meckling, 1976). I included institutional theory and KBV perspectives because numerous studies suggest that the regulatory environment (Scott, 2003) and knowledge base of a firm (Grant, 1996b) matters in corporate risk-taking. A review of the practitioner literature also suggests that regulatory frameworks and lack of firm competence have played a role in firm risk-taking behavior (Pirson & Turnbull, 2011; Summers, 2011; Wallison, 2011).

My analysis suggests that both external and internal factors were associated with excessive corporate risk-taking among investment banks. External factors associated with firm risk-taking include the institutional environment, such as regulation (or absence thereof). Internal factors associated with firm risk-taking include aspirations of executives, level of corporate diversification, knowledge base of company, number of interlocking directorships in the board, size of the board, ratio of insiders to outsiders on the board, and ownership of the stock by board members of investment banks.

The findings of this study contribute to the literature on corporate risk-taking behavior, and suggest that the study of such a complex phenomenon as corporate-risk taking needs to be done using multiple theoretical perspectives.

DOI

10.25777/wjpe-c135

ISBN

9781267963185

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