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CEO option compensation and systemic risk in the banking industry

Author

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  • Jeong-Bon Kim
  • Li Li
  • Mary L. Z. Ma
  • Frank M. Song

Abstract

We document that CEO risk-taking incentives induced by stock option compensation increase a bank’s contribution to systemic distress risk and systemic crash risk through reacting to common risk exposure of the banking industry. We also find that this relation operates through channels of engagement in non-interest income-generating activities and maturity mismatch associated with short-term debt financing. Further analysis reveals that CEO option-based risk-taking incentives increase investments in innovative financial products that form naturally interconnected networks, which increase systemic risk. Finally, we show that market illiquidity and financial crisis accentuate the relation between CEO risk-taking incentives and systemic risk.

Suggested Citation

  • Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2016. "CEO option compensation and systemic risk in the banking industry," Asia-Pacific Journal of Accounting & Economics, Taylor & Francis Journals, vol. 23(2), pages 131-160, June.
    • Handle: RePEc:taf:raaexx:v:23:y:2016:i:2:p:131-160
    DOI: 10.1080/16081625.2016.1155250
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    References listed on IDEAS

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    1. Marina Balboa & Germán López-Espinosa & Korok Ray & Antonio Rubia, 2012. "Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding," Faculty Working Papers 04/12, School of Economics and Business Administration, University of Navarra.
    2. Krahnen, Jan Pieter & Wilde, Christian, 2008. "Risk transfer with CDOs," CFS Working Paper Series 2008/15, Center for Financial Studies (CFS).
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    Cited by:

    1. Yu, Zeng, 2024. "Essays on incentive contract and corporate finance," Other publications TiSEM 6f66f49e-d710-44f6-943d-9, Tilburg University, School of Economics and Management.
    2. Pruijssers, Jorien Louise & Singer, Gallia & Singer, Zvi & Tsang, Desmond, 2023. "Social influence pressures and the risk preferences of aspiring financial market professionals," Journal of Accounting Education, Elsevier, vol. 62(C).
    3. Mary L. Z. Ma & Victor Song, 2016. "Discretionary Loan Loss Provisions and Systemic Risk in the Banking Industry," Accounting Perspectives, John Wiley & Sons, vol. 15(2), pages 89-130, June.

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