CEO incentives and bank risk

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...

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Bibliographic Details
Published in:Journal of economics and business 2011-09, Vol.63 (5), p.456-471
Main Authors: Acrey, James Cash, McCumber, William R., Nguyen, Thu Hien T.
Format: Article
Language:English
Subjects:
Bank
Bank failure
Bank regulation
Bank risk
CEO compensation
CEO compensation Bank risk Bank regulation Bank failure Bank EDF
EDF
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Summary: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.
ISSN:0148-6195
1879-1735
DOI:10.1016/j.jeconbus.2010.09.002