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CEO incentives and bank risk

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  • Acrey, James Cash
  • McCumber, William R.
  • Nguyen, Thu Hien T.
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    Abstract

    We investigate the relationship between CEO compensation and bank default risk predictors to determine if short-term incentives can explain recent excesses in bank risk. We investigate early warning off-site surveillance parameters and expected default frequency (EDF) as well as crisis-related risky bank activities. We find only modest evidence that CEO compensation structures promote significant firm-specific heterogeneity in bank risk measures or risky activities. Compensation elements commonly thought to be the riskiest components, unvested options and bonuses, are either insignificant or negatively correlated with common risk variables, and only positively significant in predicting the level of trading assets and securitization income.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 456-471

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:456-471

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    Web page: http://www.elsevier.com/locate/jeconbus

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    Keywords: CEO compensation Bank risk Bank regulation Bank failure Bank EDF;

    References

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    1. Gian Luca Clementi & Thomas Cooley, 2009. "Executive Compensation: Facts," Working Papers 09-16, New York University, Leonard N. Stern School of Business, Department of Economics.
    2. Rüdiger Fahlenbrach & René M. Stulz, 2009. "Bank CEO Incentives and the Credit Crisis," NBER Working Papers 15212, National Bureau of Economic Research, Inc.
    3. Alan V. S. Douglas, 2006. "Capital Structure, Compensation and Incentives," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 605-632.
    4. Murphy, Kevin J., 2000. "Performance standards in incentive contracts," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 245-278, December.
    5. Levine, Ross, 2004. "The Corporate Governance of Banks - a concise discussion of concepts and evidence," Policy Research Working Paper Series 3404, The World Bank.
    6. Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
    7. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    8. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
    9. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-82, October.
    10. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2000. "The role of a CAMEL downgrade model in bank surveillance," Working Papers 2000-021, Federal Reserve Bank of St. Louis.
    11. Bryan, Stephen & Hwang, LeeSeok & Lilien, Steven, 2000. "CEO Stock-Based Compensation: An Empirical Analysis of Incentive-Intensity, Relative Mix, and Economic Determinants," The Journal of Business, University of Chicago Press, vol. 73(4), pages 661-93, October.
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    Blog mentions

    As found by EconAcademics.org, the blog aggregator for Economics research:
    1. Freddie and the Crisis
      by Jonathan Finegold in Economic Thought on 2012-11-13 13:00:33
    2. The Price of Inequality: the Good, the Bad, and the Ugly
      by Jonathan Finegold in Economic Thought on 2012-12-22 16:00:07

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