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CEO inside debt and hedging decisions: Lessons from the U.S. banking industry

Author

Listed:
  • Mohamed Belkhir

    (college of business and economics)

  • Sabri Boubaker

Abstract

Theoretical literature (0170 and 0095) argues that inside debt – pension benefits and deferred compensation – has debt-like payoffs, and can therefore curb executives' excessive risk-taking incentives created by equity holdings. We test this theory in the banking sector by investigating whether CEOs with larger inside debt holdings compared to their equity-based compensation hedge more their banks' interest rate risk. Our results show that CEO inside debt holdings have a positive effect on the extent to which a bank uses interest rate derivatives for hedging purposes, implying that debt-like compensation mitigates bank executives' risk-taking incentives. Our results have important implications for financial regulation attempting to prevent financial crises due, at least partially, to perverse incentives provided to bank executives through compensation.

Suggested Citation

  • Mohamed Belkhir & Sabri Boubaker, 2013. "CEO inside debt and hedging decisions: Lessons from the U.S. banking industry," Post-Print hal-01155502, HAL.
    • Handle: RePEc:hal:journl:hal-01155502
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    Cited by:

    1. Chowdhury, Rajib & Doukas, John A. & Mandal, Sonik, 2023. "CEO risk preferences, hedging intensity, and firm value," Journal of International Money and Finance, Elsevier, vol. 130(C).
    2. Boubaker, Sabri & Chebbi, Kaouther & Grira, Jocelyn, 2020. "Top management inside debt and corporate social responsibility? Evidence from the US," The Quarterly Review of Economics and Finance, Elsevier, vol. 78(C), pages 98-115.
    3. Patrick Hertrampf & Thomas M. Brunner-Kirchmair & Martin R. W. Hiebl & Arnd Wiedemann, 2025. "The Relationship Between CEO Characteristics and Banks’ Risk-Taking: Review and Research Directions [Die Beziehung zwischen CEO-Charakteristika und der Risikobereitschaft von Banken: Literaturüberb," Schmalenbach Journal of Business Research, Springer, vol. 77(1), pages 127-178, March.
    4. Aymen Ammari & Sarra Amdouni & Ahmed Zemzem & Abderrazak Ellouze, 2016. "The Effect of Monitoring Committees on the Relationship between Board Structure and Firm Performance," JRFM, MDPI, vol. 9(4), pages 1-13, December.
    5. Kanyarat (Lek) Sanoran, 2022. "Lessening Effects of SOX on the Relationship between Executive Compensation Components and Cost of Equity Capital," IJFS, MDPI, vol. 10(3), pages 1-12, July.
    6. Houssein Ballouk & Sami Ben Jabeur & Sabri Boubaker & Salma Mefteh-Wali, 2024. "The effect of social media on bank performance: an fsQCA approach," Electronic Commerce Research, Springer, vol. 24(1), pages 477-495, March.
    7. Fan, Ruoyu & Ren, Ziming, 2025. "Effects of CEO inside debt on corporate ESG behavior: role of major shareholders," Finance Research Letters, Elsevier, vol. 81(C).
    8. Liu Gan & Mingyu Xu & Yingxian Tan & Linyue Chen, 2024. "Optimal design of deferred compensation for bank executives under agency conflicts," International Review of Finance, International Review of Finance Ltd., vol. 24(4), pages 772-792, December.
    9. Liu, Chen & Wu, Yan Wendy, 2022. "CEO compensation and bank loan contracts," The Quarterly Review of Economics and Finance, Elsevier, vol. 86(C), pages 420-436.
    10. Belghitar, Yacine & Clark, Ephraim, 2015. "Managerial risk incentives and investment related agency costs," International Review of Financial Analysis, Elsevier, vol. 38(C), pages 191-197.
    11. Guanming He, 2015. "The effect of CEO inside debt holdings on financial reporting quality," Review of Accounting Studies, Springer, vol. 20(1), pages 501-536, March.
    12. Krapl, Alain A. & White, Reilly S., 2016. "Executive pensions, risk-shifting, and foreign exchange exposure," Research in International Business and Finance, Elsevier, vol. 38(C), pages 376-392.
    13. 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.
    14. Jeffrey (Jun) Chen & Yun Guan & Ivy Tang, 2020. "Optimal Contracting of Pension Incentive: Evidence of Currency Risk Management in Multinational Companies," JRFM, MDPI, vol. 13(2), pages 1-29, February.
    15. Deng, Kebin & Ge, Wenxia & He, Jing, 2021. "Inside debt and shadow banking," Journal of Corporate Finance, Elsevier, vol. 69(C).
    16. Ashrafee Hossain & Samir Saadi & Abu S. Amin, 2023. "Does CEO Risk-Aversion Affect Carbon Emission?," Journal of Business Ethics, Springer, vol. 182(4), pages 1171-1198, February.
    17. Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2020. "Optimize the Banker’s Multi-Stage Decision-Making and the Mechanism of Pay Contract Influencing on Bank Default Risk in the Long-Term Model," Sustainability, MDPI, vol. 12(4), pages 1-22, February.
    18. Lee, Chien-Chiang & Wang, Chih-Wei & Wu, Yu-Ching, 2023. "CEO inside debt and downside risk: Evidence from internal and external environments," Pacific-Basin Finance Journal, Elsevier, vol. 80(C).
    19. Mijoo Lee & In Tae Hwang, 2019. "The Effect of the Compensation System on Earnings Management and Sustainability: Evidence from Korea Banks," Sustainability, MDPI, vol. 11(11), pages 1-24, June.
    20. Kabir, Rezaul & Li, Hao & Veld-Merkoulova, Yulia, 2018. "Do managers act opportunistically towards the end of their career?," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 56(C), pages 218-232.

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    Keywords

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    JEL classification:

    • 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
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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