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Bankers’ stock options, risk-taking and the financial crisis

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  • Minhat, Marizah
  • Abdullah, Mazni

Abstract

This study investigates the relationship between the use of stock options and bank risk in the context of the 2007–2008 financial crisis for banks that are authorised to accept deposits in the United Kingdom. These banks are affected by the European regulation on variable pay, but, to our knowledge, their usage of stock options has not been examined in previous studies. Paying bankers with stock options can generate two types of managerial incentives, namely, incentives to improve performance and incentives to take risk. Controlling for incentives to improve performance, we find that banks’ total risk and insolvency risk increase with the risk-taking incentives induced by stock options. We also find that this relationship is more pronounced surrounding the crisis period. The findings of this study can serve as institutionally relevant empirical support for the European regulation on variable pay.

Suggested Citation

  • Minhat, Marizah & Abdullah, Mazni, 2016. "Bankers’ stock options, risk-taking and the financial crisis," Journal of Financial Stability, Elsevier, vol. 22(C), pages 121-128.
    • Handle: RePEc:eee:finsta:v:22:y:2016:i:c:p:121-128
    DOI: 10.1016/j.jfs.2016.01.008
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    7. Al-Own, Bassam & Minhat, Marizah & Gao, Simon, 2018. "Stock options and credit default swaps in risk management," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 53(C), pages 200-214.

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    More about this item

    Keywords

    Executive pay; Stock options; Vega; Bank risk-taking; Financial crisis;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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