The Relationship between the Risk Management Level and the Financial Performance in the Investment Banking Industry

Abstract Aiming at investigating the relationship between the risk management level and the financial performance in the investment banking industry, this paper selects 55 investment banks in various countries from 2008 to 2018 and examines the impacts of the presence of a CRO and the size of the risk committee on return on assets (ROA), return on equity (ROE), and market-to-book ratio (MBR) respectively. In this study, the selected investment banks are divided into new and old investment banks according to their ages, which could be a sign of the level of a bank’s experience or popularity. With other parameters such as the firm size, the age, the leverage, and the revenue growth controlled, we find that the adoption of a CRO has a significant and negative relationship with both new and old investment banks’ ROE in the adoption year and that the positive effect of having a CRO on ROE takes three years to appear in new investment banks and one year to appear in old investment banks. We also find that the adoption of a CRO has a negative relationship with old investment banks’ ROA in the adoption year, and the positive effect starts to appear in one year. However, the results show no evidence that employing a CRO is significantly related to new investment banks’ ROA or either group of investment banks’ MBR. The regression results also fail to show significant impacts of the size of the risk committee on any form of financial performance selected in this paper. This study offers new empirical evidence and a different perspective for studies on the effects of a higher risk management level in the investment banking industry and could be a basis for future research on relevant topics