Bank CEO Optimism and the Financial Crisis

Abstract

I test theories of the recent financial crisis by studying how banks' pre-crisis investments connect to their CEOs' beliefs. Using different proxies for beliefs, I find banks with larger housing investments and worse crisis performance had CEOs who were more optimistic ex ante. Banks with the most optimistic CEOs experienced 20 percentage points higher real estate loan growth, and 15 percentage points lower crisis period stock returns. Bank decisions appear consistent with CEO beliefs. CEOs' optimism contributed to credit expansions and crisis losses. I do not find evidence that CEOs made housing investments due to agency frictions while aware of impending problems.