Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry
Abbreviated Journal Title
J. Bank Financ.
risk-taking; executive compensation; banking industry; FIRM PERFORMANCE; HOLDING COMPANIES; PAY; INVESTMENT; DEREGULATION; INCENTIVES; OWNERSHIP; TURNOVER; Business, Finance; Economics
We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992-2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks. (c) 2005 Elsevier B.V. All rights reserved.
Journal of Banking & Finance
"Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry" (2006). Faculty Bibliography 2000s. 6020.