The effect of employee stock options on bank investment choice, borrowing, and capital

Hamid Mehran and Joshua Rosenberg

No 305, Staff Reports from Federal Reserve Bank of New York

Abstract: In this paper, we test the hypothesis that granting employee stock options motivates CEOs of banking firms to undertake riskier projects. We also investigate whether granting employee stock options reduces the bank's incentive to borrow while inducing a buildup of regulatory capital. Using a sample of 549 bank-years for publicly traded banks from 1992 to 2002, we find some evidence that the bank's equity volatility (total as well as residual) and asset volatility increase as CEO stock option holdings increase. In addition, it appears that granting employee stock options motivates banks to reduce their borrowing, as evidenced by lower levels of interest expense and federal funds borrowing. Furthermore, we show that banking firms that grant more options to their employees build up more capital in future years.

Keywords: Stock options; Bank stocks; Bank directors; Bank employees; Employee fringe benefits; Bank capital (search for similar items in EconPapers)
Date: 2007
New Economics Papers: this item is included in nep-ban
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (18)

Downloads: (external link)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr305.html (text/html)
https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr305.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fednsr:305

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Staff Reports from Federal Reserve Bank of New York Contact information at EDIRC.
Bibliographic data for series maintained by Gabriella Bucciarelli ().