Modeling put-option margin and default risk when labor has a voice in bank governance mechanism

Authors:
Chuen-Ping Chang;Jyh-Jiuan Lin;Jeng-Yan Tsai
Affiliations:
Graduate Institute of Commerce, Kaohsiung University of Applied Sciences, Taiwan;Department of Statistics, Tamkang University, Taiwan;Department of International Trade, Tamkang University, Taiwan
Venue:
WSEAS Transactions on Mathematics
Year:
2010

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Abstract

Although considerable research effort has been put toward modeling governance mechanisms for the purpose of valuing investment decisions written on them, little attention has been paid to the effects of governance mechanisms by labor voice on bank operations management. Like entrenched operations management, entrenched labor cannot be gotten rid of easily. This paper demonstrates how labor voice determines the optimal bank interest margin and default risk decisions. Our model is based on a regime giving corporate governance power to current labor and then labor's objective is equivalent to minimizing the equity value of the put option. We show that the governance voice pushes bank interest margin determination toward shareholder value maximization. However, an opportunity cost of bank governance from listening labor voice is increasing the bank's default risk in equity returns.