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CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry

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  • Jeong-Bon Kim

    (City University of Hong Kong)

  • Li Li

    (University of International Business and Economics and Hong Kong Institute for Monetary Research)

  • Mary L. Z. Ma

    (York University)

  • Frank M. Song

    (University of Hong Kong)

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    Abstract

    This study predicts and finds that chief executive officer (CEO) risk-taking incentives induced by stock option compensation increase a bank's contribution to systemic distress risk and systemic crash risk. We also predict and find that this CEO incentive systemic risk relation operates through three channels (i) a bank's engagement in non-interest income-generating activities, (ii) investments in innovative financial products such as collateralized debt obligations and credit default swaps, and (iii) maturity mismatch associated with on short-term debt financing. Finally, the CEO incentive-systemic risk relation is moderated by information transparency, bank size, market liquidity, and financial crisis. We also discuss relevant policy implications.

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    Bibliographic Info

    Paper provided by Hong Kong Institute for Monetary Research in its series Working Papers with number 182013.

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    Length: 57 pages
    Date of creation: Oct 2013
    Date of revision:
    Handle: RePEc:hkm:wpaper:182013

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