Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis. (7th November 2017)

• Record Type: Journal Article
• Authors: Boyallian, Patricia; Ruiz-Verdú, Pablo
• Is Part Of: Review of finance. Volume 22:Number 5(2018)
• Page Start: 1763
• Page End: 1805
• Publication Date: 2017-11-07
• Subjects: Executive compensation -- Risk-taking incentives -- Leverage -- Banks -- Financial crisis; Finance -- Europe -- Periodicals; Financiën; Finance; Periodicals; 332.09405
• DOI: 10.1093/rof/rfx051
• Languages: English
• ISSNs: 1572-3097

Abstract

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.