Essays on operational risk in the banking industry

Persand-Gujadhur Gya, Hurvashee (2020) Essays on operational risk in the banking industry. PhD thesis, University of Nottingham.

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This thesis consists of three distinct essays on operational risk in the U.S. banking industry. The first essay investigates whether operational risk events trigger rating agencies, such as S&P, to downgrade credit ratings of affected U.S. banks over the period 1990 to 2014. Our results suggest that disclosed maximum operational loss as a proportion of market value as well as consequent drops in stock market prices have a negative and significant effect on banks’ credit ratings through its ratings score, provided by S&P. The findings are robust to severe operational risk events with loss amounts exceeding $10 million. We also find that post-Global Financial Crisis, S&P becomes more accurate in issuing credit ratings following the disclosure of the severity of operational risk events.

The second essay examines analyst forecast revision and accuracy around operational risk event announcements in U.S. banks over the period 1990 to 2016. It also investigates the individual effects of career concerns of banking analysts, competition among analysts and the Global Financial Crisis on analyst forecasting behaviour following the bad news disclosure. Our results suggest that analysts, that were previously optimistic, revise their forecasts significantly downwards, hence, improving their forecast accuracy. On the other hand, we find that competition causes analysts to issue upward-biased forecasts. The results are more pronounced for severe operational risk events with loss amounts exceeding $10 and $35 million.

The third essay examines the impact of operational risk event announcements, which are considered as a new measure of firm performance, on CEO compensation in U.S. banks over the period 1992 to 2016. Our results suggest that the frequency of operational risk events disclosed has a negative and significant impact on banking executives’ compensation, mainly in terms of their option-based compensation. We also find that the higher the compensation committee to board size ratio, the more the CEO will be penalised through a reduction in their options following the frequency of operational risk event announcements. The results are more pronounced following the Global Financial Crisis and the Dodd-Frank Act.

Item Type: Thesis (University of Nottingham only) (PhD)
Supervisors: Barakat, Ahmed
Amess, Kevin
Keywords: Banks and banking, United States; Operational risk; Credit ratings; Business analysts; Executives
Subjects: H Social sciences > HG Finance
Faculties/Schools: UK Campuses > Faculty of Social Sciences, Law and Education > Nottingham University Business School
Item ID: 60964
Depositing User: Persand-Gujadhur Gya, Hurvashee
Date Deposited: 28 Jul 2020 13:03
Last Modified: 28 Jul 2020 13:15

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