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Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis
[Endogenous matching and the empirical determinants of contract form]

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  • Patricia Boyallian
  • Pablo Ruiz-Verdú

Abstract

Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO’s wealth to his firm’s stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large US financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007–10 financial crisis in highly levered firms, but not in less levered firms.

Suggested Citation

  • Patricia Boyallian & Pablo Ruiz-Verdú, 2018. "Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis [Endogenous matching and the empirical determinants of contract form]," Review of Finance, European Finance Association, vol. 22(5), pages 1763-1805.
    • Handle: RePEc:oup:revfin:v:22:y:2018:i:5:p:1763-1805.
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