CEO Compensation and Risk-Taking in Banking Industry

Abstract : The 2008 financial crisis was largely caused by excessive risk-taking of banks from the U.S. and also from all over the world, which have been in big trouble since then. One of the major questions raised by scientists and regulators is the role of executive remuneration methods in encouraging bank risk-taking. We conduct this research to investigate whether the banks' executive compensation payment mechanisms induced risk-taking and contributed to the financial crisis. We analyze separately the impact of each component of CEO compensation, which include CEO salary, CEO bonus, CEO other annual compensation, percentage of CEO salary, percentage of CEO bonus, percentage of other annual compensation and equity-based compensation, on risk-taking in the banking sector. We also try to identify more specifically the possible responsibility of each remuneration method in triggering the financial crisis and the manifestations of bank risk in the first two years of crisis. Different measures of bank risk include total risk, systematic risk, idiosyncratic risk, loan loss provision to total loan ratio, non-performing loan to total loan ratio, distance-todefault measured by Z-score, sharp drop in bank stock price, the change in bank ratings and the change in CDS during the crisis period. Using a sample of 63 large banks in Europe, Canada and United States from 2004 to 2008 we find that both CEO salary and CEO bonus decrease with most types of bank risk, CEO other annual compensation increases with bank risk. These components of CEO compensation are illustrated to have no relationship to the change of bank risk during the crisis. Regarding the CEO equity-based compensation, we find that usage of restricted stock to compensate CEO during the pre-crisis period has no effect on any abnormal changes in bank risks during the crisis period, whereas usage of stock option to compensate CEO in the same period augments the manifestations of bank risk in the crisis.
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Thi Phuong Mai Le. CEO Compensation and Risk-Taking in Banking Industry. Business administration. Université de Lorraine, 2015. English. ⟨NNT : 2015LORR0215⟩. ⟨tel-01754527⟩

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