Managerial risk-taking incentives and the systemic risk of financial institutions

Review of Quantitative Finance and Accounting - Tập 53 - Trang 1229-1258 - 2018
Jamshed Iqbal1, Sami Vähämaa1
1School of Accounting and Finance, University of Vaasa, Vaasa, Finland

Tóm tắt

This paper examines whether the systemic risk of financial institutions is associated with the risk-taking incentives generated by executive compensation. We measure managerial risk-taking incentives with the sensitivities of chief executive officer (CEO) and chief financial officer (CFO) compensation to changes in stock prices (pay-performance sensitivity) and stock return volatility (pay-risk sensitivity). Using data on large U.S. financial institutions over the period 2005–2010, we document a negative association between systemic risk and the sensitivities of CEO and CFO compensation to stock return volatility. However, our results also demonstrate that financial institutions with greater managerial risk-taking incentives were associated with significantly higher levels of systemic risk during the peak of the financial crisis in 2008. We further document that the relation between pay-performance sensitivity and systemic risk is essentially nonexistent. Overall, our empirical findings indicate that the association between managerial risk-taking incentives and banks’ systemic risk is ambiguous and is not stable over time.

Tài liệu tham khảo

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