Insider Ownership and Bank Performance: Evidence from the Financial Crisis of 2007-2009

This paper examines the relation between insider ownership and bank performance in the United States before and during the recent financial crisis of 2007 – 2009. For the period before this crisis, we find a curvilinear relation between insider ownership and bank performance. Bank performance first increases, then decreases, and finally increases again with the rise of insider ownership. During the financial crisis, we find an inverted-U shaped relation between insider ownership and bank performance. Overall, our results are consistent with the notion that managers with higher ownership are better aligned the interests of shareholders (Jensen and Meckling 1976). Managers adopt effective strategies on the bank performance before the crisis, but those make a negative impact during the financial crisis.