Research On The Influence Of TMTs’ Social Connection On Commercial Bank’s Risk-taking

The financial crisis in 2008 has had destructive impacts on the entire global financial sector and the real economy, with the problem stemming from financial institutions searching blindly for profit, relaxing credit constraints and withstanding excessive amount of risk. Existing researches related to top management team (TMT) especially TMTs’social connection are lacked. Hence, researching the effect of TMTs’social connection is significant.The paper makes research by mathematical models and empirical analysis. Combined with past domestic and foreign researches, the paper defines bank’s risk-taking, the range and meaning of the social connection of banks’TMT. Through classical upper echelons theory, social capital theory and theory of interlocking directorate, the paper aims to explain the relationship between bank’s executive management and bank’s risk-taking behavior. In addition, the paper builds upon the principal-agent theory and adds a TMT social connection variable, analyzes three different types of such connection and their effects on bank’s risk-taking. Based on mathematical models, the paper uses data from 42 Chinese banks as sample for empirical analysis. Results show that TMTs’social connection are negatively correlated to bank’s risk taking. When competition level is low in the banking industry, executives utilize their social connection to raise the risk tolerance level and promote bank to take on more risks. Shareholders from a bank that have high capital adequacy percentage will devote more resources. To safeguard their own interest, the shareholders will increase the level of regulations and control regarding banks’executives, whose risk tolerance level will be decreased. Enlisting publicly will increase the transparency of commercial banks, increase the level of public regulations on banks and their TMT who have political connection or, and suppress banks’risk-taking behavior. But it also enhance banks’awareness and increase banks’capital, which lead to more debit demand from related companies.Why it is innovative:Firstly, the paper researches on banks’risk-taking in view of TMTs’social connection; Secondly, the paper improve the mathematical model on TMTs’ effect based on principal agent model which considering the protection of investors. In addition, the paper confirms the effect of TMTs’social connection and then identifies the change of its effect in different condition.