Title

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

Authors

Authors

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

Comments

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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

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