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CEO pay incentives and risk-taking: Evidence from bank acquisitions

  • Hagendorff, Jens
  • Vallascas, Francesco

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from [`]too big to fail' support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.

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Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 17 (2011)
Issue (Month): 4 (September)
Pages: 1078-1095

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Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:1078-1095
Contact details of provider: Web page: http://www.elsevier.com/locate/jcorpfin

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