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CEO incentives and bank risk

  • Acrey, James Cash
  • McCumber, William R.
  • Nguyen, Thu Hien T.
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    We investigate the relationship between CEO compensation and bank default risk predictors to determine if short-term incentives can explain recent excesses in bank risk. We investigate early warning off-site surveillance parameters and expected default frequency (EDF) as well as crisis-related risky bank activities. We find only modest evidence that CEO compensation structures promote significant firm-specific heterogeneity in bank risk measures or risky activities. Compensation elements commonly thought to be the riskiest components, unvested options and bonuses, are either insignificant or negatively correlated with common risk variables, and only positively significant in predicting the level of trading assets and securitization income.

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    File URL: http://www.sciencedirect.com/science/article/pii/S0148619510000640
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    Article provided by Elsevier in its journal Journal of Economics and Business.

    Volume (Year): 63 (2011)
    Issue (Month): 5 (September)
    Pages: 456-471

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    Handle: RePEc:eee:jebusi:v:63:y:2011:i:5:p:456-471
    Contact details of provider: Web page: http://www.elsevier.com/locate/jeconbus

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    1. Levine, Ross, 2004. "The Corporate Governance of Banks - a concise discussion of concepts and evidence," Policy Research Working Paper Series 3404, The World Bank.
    2. Gian Luca Clementi & Thomas Cooley, 2009. "Executive Compensation: Facts," Working Papers 09-16, New York University, Leonard N. Stern School of Business, Department of Economics.
    3. Murphy, Kevin J., 1999. "Executive compensation," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 38, pages 2485-2563 Elsevier.
    4. Stiroh, Kevin J, 2004. "Diversification in Banking: Is Noninterest Income the Answer?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 36(5), pages 853-82, October.
    5. R. Alton Gilbert & Andrew P. Meyer & Mark D. Vaughan, 2000. "The role of a CAMEL downgrade model in bank surveillance," Working Papers 2000-021, Federal Reserve Bank of St. Louis.
    6. Murphy, Kevin J., 2000. "Performance standards in incentive contracts," Journal of Accounting and Economics, Elsevier, vol. 30(3), pages 245-278, December.
    7. Alan V. S. Douglas, 2006. "Capital Structure, Compensation and Incentives," Review of Financial Studies, Society for Financial Studies, vol. 19(2), pages 605-632.
    8. Fahlenbach, Rudiger & Stulz, Rene M., 2009. "Bank CEO Incentives and the Credit Crisis," Working Paper Series 2009-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    9. Jeitschko, Thomas D. & Jeung, Shin Dong, 2005. "Incentives for risk-taking in banking - A unified approach," Journal of Banking & Finance, Elsevier, vol. 29(3), pages 759-777, March.
    10. Houston, Joel F. & James, Christopher, 1995. "CEO compensation and bank risk Is compensation in banking structured to promote risk taking?," Journal of Monetary Economics, Elsevier, vol. 36(2), pages 405-431, November.
    11. Ing-Haw Cheng & Harrison Hong & Jose Scheinkman, 2010. "Yesterday's Heroes: Compensation and Creative Risk-Taking," NBER Chapters, in: Market Institutions and Financial Market Risk National Bureau of Economic Research, Inc.
    12. Bryan, Stephen & Hwang, LeeSeok & Lilien, Steven, 2000. "CEO Stock-Based Compensation: An Empirical Analysis of Incentive-Intensity, Relative Mix, and Economic Determinants," The Journal of Business, University of Chicago Press, vol. 73(4), pages 661-93, October.
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