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Do bank CEOs really increase risk in vega? Evidence from a dynamic panel GMM specification

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  • Bharati, Rakesh
  • Jia, Jingyi

Abstract

Previous executive compensation studies find that firm risk increases in the risk-taking incentive (vega) of CEOs’ compensation packages. However, the standard methodology of two-stage least squares (2SLS) regression can suffer from invalid instruments. Using a dynamic panel generalized method of moments (GMM) specification to control for dynamic endogeneity, unobserved heterogeneity, and simultaneity (Wintoki, Linck, & Netter, 2012), we find no evidence of a positive relationship between risk and vega for banking firms. Furthermore, across institutions, CEOs’ pay-performance sensitivity (delta) positively relates to the risk. Finally, high-leverage banks and commercial banks seem less prone to risk increases in delta relative to the entire sample of financial institutions. These results are important to investors, boards, regulators, and creditors, as they are all concerned with the risk of the financial institution.

Suggested Citation

  • Bharati, Rakesh & Jia, Jingyi, 2018. "Do bank CEOs really increase risk in vega? Evidence from a dynamic panel GMM specification," Journal of Economics and Business, Elsevier, vol. 99(C), pages 39-53.
  • Handle: RePEc:eee:jebusi:v:99:y:2018:i:c:p:39-53
    DOI: 10.1016/j.jeconbus.2018.06.001
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    Keywords

    CEO compensation; Dynamic panel GMM model; Bank risk-taking;

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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