Executive compensation and risk taking
AbstractThis paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.
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Bibliographic InfoPaper provided by Federal Reserve Bank of New York in its series Staff Reports with number 456.
Date of creation: 2010
Date of revision:
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-07-24 (All new papers)
- NEP-BAN-2010-07-24 (Banking)
- NEP-BEC-2010-07-24 (Business Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
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Cahiers de recherche
8827, Centre interuniversitaire de recherche en économie quantitative, CIREQ.
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- Smith, C.W. & Watts, R.L., 1992.
"The Investment Oppotunity set and Corporate Financing, Dividend and Compensation Policies,"
92-02, Rochester, Business - Financial Research and Policy Studies.
- Smith, Clifford Jr. & Watts, Ross L., 1992. "The investment opportunity set and corporate financing, dividend, and compensation policies," Journal of Financial Economics, Elsevier, vol. 32(3), pages 263-292, December.
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page. reading lists or Wikipedia pages:
- Executive compensation in the United States in Wikipedia English ne '')
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