Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry

    Authors

    C. R. Chen; T. L. Steiner;A. M. Whyte

    Comments

    Authors: contact us about adding a copy of your work at STARS@ucf.edu

    Abbreviated Journal Title

    J. Bank Financ.

    Keywords

    risk-taking; executive compensation; banking industry; FIRM PERFORMANCE; HOLDING COMPANIES; PAY; INVESTMENT; DEREGULATION; INCENTIVES; OWNERSHIP; TURNOVER; Business, Finance; Economics

    Abstract

    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 Title

    Journal of Banking & Finance

    Volume

    30

    Issue/Number

    3

    Publication Date

    1-1-2006

    Document Type

    Article

    Language

    English

    First Page

    915

    Last Page

    945

    WOS Identifier

    WOS:000236642200007

    ISSN

    0378-4266

    Share

    COinS