CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry

Jeong-Bon Kim, Li Li, Mary L. Z. Ma and Frank Song
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Jeong-Bon Kim: City University of Hong Kong
Li Li: University of International Business and Economics and Hong Kong Institute for Monetary Research
Mary L. Z. Ma: York University

Working Papers from Hong Kong Institute for Monetary Research

Abstract: This study predicts and finds that chief executive officer (CEO) risk-taking incentives induced by stock option compensation increase a bank's contribution to systemic distress risk and systemic crash risk. We also predict and find that this CEO incentive systemic risk relation operates through three channels (i) a bank's engagement in non-interest income-generating activities, (ii) investments in innovative financial products such as collateralized debt obligations and credit default swaps, and (iii) maturity mismatch associated with on short-term debt financing. Finally, the CEO incentive-systemic risk relation is moderated by information transparency, bank size, market liquidity, and financial crisis. We also discuss relevant policy implications.

JEL-codes: G01 G21 G32 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2013-10
New Economics Papers: this item is included in nep-ban, nep-cfn, nep-cta and nep-hrm
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Citations: View citations in EconPapers (1)

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