Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007-10 Financial Crisis Articles uri icon

publication date

  • August 2018

start page

  • 1763

end page

  • 1805

issue

  • 5

volume

  • 22

International Standard Serial Number (ISSN)

  • 1572-3097

Electronic International Standard Serial Number (EISSN)

  • 1875-824X

abstract

  • Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO's wealth to his firm's stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large US financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007-10 financial crisis in highly levered firms, but not in less levered firms.

keywords

  • executive compensation; risk-taking incentives; leverage; banks; financial crisis; stock option portfolios; executive-compensation; corporate governance; severance pay; debt; sensitivities; performance; managers; default; choice