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Ex ante CEO severance pay and risk-taking in the financial services sector

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  • Brown, Kareen
  • Jha, Ranjini
  • Pacharn, Parunchana

Abstract

We examine 533 CEO severance contracts for financial services firms from 1997 to 2007 and find that ex ante severance pay is positively associated with risk-taking after controlling for the incentive effects provided by equity-based compensation. We report a positive causal relation between the amount of severance pay and risk-taking using popular market-based risk measures as well as the distance-to-default and the Z-score. We also find that severance pay encourages excessive risk-taking using metrics such as tail risk and asset quality. Our results are consistent with the risk-shifting argument and provide support for recent reforms on severance pay in the financial sector.

Suggested Citation

  • Brown, Kareen & Jha, Ranjini & Pacharn, Parunchana, 2015. "Ex ante CEO severance pay and risk-taking in the financial services sector," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 111-126.
    • Handle: RePEc:eee:jbfina:v:59:y:2015:i:c:p:111-126
    DOI: 10.1016/j.jbankfin.2015.04.027
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    More about this item

    Keywords

    Managerial compensation; Severance pay; Excessive risk-taking;
    All these keywords.

    JEL classification:

    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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