Executive compensation and risk taking

Patrick Bolton, Hamid Mehran and Joel Shapiro

No 456, Staff Reports from Federal Reserve Bank of New York

Abstract: This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.

Keywords: Financial risk management; Executives - Salaries; Stock - Prices (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-ban and nep-bec
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Citations: View citations in EconPapers (73)

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Journal Article: Executive Compensation and Risk Taking (2015)
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