IDEAS home Printed from https://ideas.repec.org/a/spr/empeco/v63y2022i6d10.1007_s00181-022-02236-2.html
   My bibliography  Save this article

Effects of incentive pay on systemic risk: evidence from CEO compensation and CoVar

Author

Listed:
  • Natalya Zelenyuk
  • Robert Faff

    (University of Queensland
    Bond University)

Abstract

We examine the role of chief executive officers’ (CEO) pay in contribution to systemic risk in the USA. In particular, by extending the CoVar model of Adrian and Brunnermeier (Am Econ Rev 106(7):1705–1741, 2016), we document that the systemic risk measure of dollar delta CoVar is positively influenced by CEO pay. Differentiation between the types of CEO pay incentives suggests that bonus and option awards comprise major contribution to systemic risk. It follows that governance measures that are aimed at systemic risk management can benefit from distinguishing between short-term and long-term CEO incentives.

Suggested Citation

  • Natalya Zelenyuk & Robert Faff, 2022. "Effects of incentive pay on systemic risk: evidence from CEO compensation and CoVar," Empirical Economics, Springer, vol. 63(6), pages 3289-3311, December.
    • Handle: RePEc:spr:empeco:v:63:y:2022:i:6:d:10.1007_s00181-022-02236-2
    DOI: 10.1007/s00181-022-02236-2
    as

    Download full text from publisher

    File URL: http://link.springer.com/10.1007/s00181-022-02236-2
    File Function: Abstract
    Download Restriction: Access to the full text of the articles in this series is restricted.
    File URL: https://libkey.io/10.1007/s00181-022-02236-2?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Natalya Zelenyuk & Robert Faff & Shams Pathan, 2021. "The impact of voluntary capital adequacy disclosure on bank lending and liquidity creation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 61(3), pages 3915-3935, September.
    2. Sebastian Calonico & Matias D. Cattaneo & Rocio Titiunik, 2014. "Robust data-driven inference in the regression-discontinuity design," Stata Journal, StataCorp LLC, vol. 14(4), pages 909-946, December.
    3. Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
    4. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    5. Rui Albuquerque & Luís Cabral & José Guedes, 2019. "Incentive Pay and Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 32(11), pages 4304-4342.
    6. Olivier De Jonghe, 2009. "Back to the basics in banking ? A micro-analysis of banking system stability," Working Paper Research 167, National Bank of Belgium.
    7. Billio, Monica & Getmansky, Mila & Lo, Andrew W. & Pelizzon, Loriana, 2012. "Econometric measures of connectedness and systemic risk in the finance and insurance sectors," Journal of Financial Economics, Elsevier, vol. 104(3), pages 535-559.
    8. De Jonghe, Olivier, 2010. "Back to the basics in banking? A micro-analysis of banking system stability," Journal of Financial Intermediation, Elsevier, vol. 19(3), pages 387-417, July.
    9. Anginer, Deniz & Demirguc-Kunt, Asli & Zhu, Min, 2014. "How does competition affect bank systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 1-26.
    10. Shasha Liu & Robin Sickles, 2021. "The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks," Empirical Economics, Springer, vol. 60(1), pages 391-418, January.
    11. Imbens, Guido W. & Lemieux, Thomas, 2008. "Regression discontinuity designs: A guide to practice," Journal of Econometrics, Elsevier, vol. 142(2), pages 615-635, February.
    12. Murphy, Kevin J., 2013. "Executive Compensation: Where We Are, and How We Got There," Handbook of the Economics of Finance, in: G.M. Constantinides & M. Harris & R. M. Stulz (ed.), Handbook of the Economics of Finance, volume 2, chapter 0, pages 211-356, Elsevier.
    13. Guay, Wayne R. & Kepler, John D. & Tsui, David, 2019. "The role of executive cash bonuses in providing individual and team incentives," Journal of Financial Economics, Elsevier, vol. 133(2), pages 441-471.
    14. Ellis, Luci & Haldane, Andy & Moshirian, Fariborz, 2014. "Systemic risk, governance and global financial stability," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 175-181.
    15. Christian Brownlees & Robert F. Engle, 2017. "SRISK: A Conditional Capital Shortfall Measure of Systemic Risk," The Review of Financial Studies, Society for Financial Studies, vol. 30(1), pages 48-79.
    16. McCarthy, Scott & Oliver, Barry & Song, Sizhe, 2017. "Corporate social responsibility and CEO confidence," Journal of Banking & Finance, Elsevier, vol. 75(C), pages 280-291.
    17. Fuchun Li & Héctor Pérez Saiz, 2016. "Measuring Systemic Risk Across Financial Market Infrastructures," Staff Working Papers 16-10, Bank of Canada.
    18. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    19. Francis, Bill B. & Hasan, Iftekhar & John, Kose & Waisman, Maya, 2016. "Urban Agglomeration and CEO Compensation," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 51(6), pages 1925-1953, December.
    20. Sylvain Benoît & Gilbert Colletaz & Christophe Hurlin & Christophe Pérignon, 2013. "A Theoretical and Empirical Comparison of Systemic Risk Measures," Working Papers halshs-00746272, HAL.
    21. Neyland, Jordan, 2020. "Love or money: The effect of CEO divorce on firm risk and compensation," Journal of Corporate Finance, Elsevier, vol. 60(C).
    22. Faccio, Mara & Marchica, Maria-Teresa & Mura, Roberto, 2016. "CEO gender, corporate risk-taking, and the efficiency of capital allocation," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 193-209.
    23. Brisley, Neil & Cai, Jay & Nguyen, Tu, 2021. "Required CEO stock ownership: Consequences for risk-taking and compensation," Journal of Corporate Finance, Elsevier, vol. 66(C).
    24. Demyanyk, Yuliya & Hasan, Iftekhar, 2010. "Financial crises and bank failures: A review of prediction methods," Omega, Elsevier, vol. 38(5), pages 315-324, October.
    25. Natalya Zelenyuk & Robert Faff & Shams Pathan, 2020. "Size‐conditioned mandatory capital adequacy disclosure and bank intermediation," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(4), pages 4387-4417, December.
    26. Bennett, Benjamin & Bettis, J. Carr & Gopalan, Radhakrishnan & Milbourn, Todd, 2017. "Compensation goals and firm performance," Journal of Financial Economics, Elsevier, vol. 124(2), pages 307-330.
    27. Viral V. Acharya & Nada Mora, 2015. "A Crisis of Banks as Liquidity Providers," Journal of Finance, American Finance Association, vol. 70(1), pages 1-43, February.
    28. Bhagat, Sanjai & Bolton, Brian, 2019. "Corporate governance and firm performance: The sequel," Journal of Corporate Finance, Elsevier, vol. 58(C), pages 142-168.
    29. Duran, Miguel A. & Lozano-Vivas, Ana, 2014. "Risk shifting in the US banking system: An empirical analysis," Journal of Financial Stability, Elsevier, vol. 13(C), pages 64-74.
    30. Matthew Richardson & Kermit L. Schoenholtz & Lawrence J. White, 2018. "Deregulating Wall Street," Annual Review of Financial Economics, Annual Reviews, vol. 10(1), pages 199-217, November.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Varotto, Simone & Zhao, Lei, 2018. "Systemic risk and bank size," Journal of International Money and Finance, Elsevier, vol. 82(C), pages 45-70.
    2. Lee, Jin-Ping & Lin, Edward M.H. & Lin, James Juichia & Zhao, Yang, 2020. "Bank systemic risk and CEO overconfidence," The North American Journal of Economics and Finance, Elsevier, vol. 54(C).
    3. Weiß, Gregor N.F. & Mühlnickel, Janina, 2014. "Why do some insurers become systemically relevant?," Journal of Financial Stability, Elsevier, vol. 13(C), pages 95-117.
    4. Colonnello, Stefano & Koetter, Michael & Wagner, Konstantin, 2023. "Compensation regulation in banking: Executive director behavior and bank performance after the EU bonus cap," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    5. Bostandzic, Denefa & Weiß, Gregor N.F., 2018. "Why do some banks contribute more to global systemic risk?," Journal of Financial Intermediation, Elsevier, vol. 35(PA), pages 17-40.
    6. Mühlnickel, Janina & Weiß, Gregor N.F., 2015. "Consolidation and systemic risk in the international insurance industry," Journal of Financial Stability, Elsevier, vol. 18(C), pages 187-202.
    7. Addo, Kwabena Aboah & Hussain, Nazim & Iqbal, Jamshed, 2021. "Corporate Governance and Banking Systemic Risk: A Test of the Bundling Hypothesis," Journal of International Money and Finance, Elsevier, vol. 115(C).
    8. Asgharian, Hossein & Krygier, Dominika & Vilhelmsson, Anders, 2019. "Systemic Risk and Centrality Revisited:The Role of Interactions," Knut Wicksell Working Paper Series 2019/1, Lund University, Knut Wicksell Centre for Financial Studies.
    9. Bierth, Christopher & Irresberger, Felix & Weiß, Gregor N.F., 2015. "Systemic risk of insurers around the globe," Journal of Banking & Finance, Elsevier, vol. 55(C), pages 232-245.
    10. Garcia-Jorcano, Laura & Sanchis-Marco, Lidia, 2021. "Systemic-systematic risk in financial system: A dynamic ranking based on expectiles," International Review of Economics & Finance, Elsevier, vol. 75(C), pages 330-365.
    11. Meuleman, Elien & Vander Vennet, Rudi, 2020. "Macroprudential policy and bank systemic risk," Journal of Financial Stability, Elsevier, vol. 47(C).
    12. Radoslav Raykov & Consuelo Silva-Buston, 2018. "Multibank Holding Companies and Bank Stability," Staff Working Papers 18-51, Bank of Canada.
    13. Raykov, Radoslav & Silva-Buston, Consuelo, 2020. "Holding company affiliation and bank stability: Evidence from the US banking sector," Journal of Corporate Finance, Elsevier, vol. 65(C).
    14. Giovanni Calice & Yong Kyu Gam, 2023. "US National Banks and Local Economic Fragility," Journal of Financial Services Research, Springer;Western Finance Association, vol. 63(3), pages 313-338, June.
    15. Liu, Frank Hong & Norden, Lars & Spargoli, Fabrizio, 2020. "Does uniqueness in banking matter?," Journal of Banking & Finance, Elsevier, vol. 120(C).
    16. Das, Sanjiv R. & Kalimipalli, Madhu & Nayak, Subhankar, 2022. "Banking networks, systemic risk, and the credit cycle in emerging markets," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 80(C).
    17. Maarten van Oordt & Chen Zhou, 2019. "Systemic risk and bank business models," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(3), pages 365-384, April.
    18. Bakkar, Yassine & Nyola, Annick Pamen, 2021. "Internationalization, foreign complexity and systemic risk: Evidence from European banks," Journal of Financial Stability, Elsevier, vol. 55(C).
    19. Weiß, Gregor N.F. & Bostandzic, Denefa & Neumann, Sascha, 2014. "What factors drive systemic risk during international financial crises?," Journal of Banking & Finance, Elsevier, vol. 41(C), pages 78-96.
    20. Adnan Safi & Xianrong Yi & Salman Wahab & Yingying Chen & Hassan Hassan, 2021. "CEO overconfidence, firm-specific factors, and systemic risk: evidence from China," Risk Management, Palgrave Macmillan, vol. 23(1), pages 30-47, June.

    More about this item

    Keywords

    Financial crises; Financial risk and Risk management; CEO incentives; CEO compensation;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:empeco:v:63:y:2022:i:6:d:10.1007_s00181-022-02236-2. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.