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Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions

Abhishek Srivastav, Seth Armitage, Jens Hagendorff and Tim King

Journal of Financial Stability, 2018, vol. 36, issue C, 208-224

Abstract: Widespread bank losses during the financial crisis have raised concerns that equity-based compensation for bank CEOs causes excessive risk-taking. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky acquisitions. Consistent with this, we show that acquisitions announced by CEOs with high inside debt incentives are associated with a wealth transfer from equity to debt holders. After the completion of a deal, banks where acquiring CEOs have high inside debt incentives display lower market measures of risk and lower loss exposures for taxpayers.

Keywords: Banks; Inside debt; CEO incentives; Mergers and acquisitions (search for similar items in EconPapers)
JEL-codes: G21 G34 J33 (search for similar items in EconPapers)
Date: 2018
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Journal of Financial Stability is currently edited by I. Hasan, W. C. Hunter and G. G. Kaufman

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Handle: RePEc:eee:finsta:v:36:y:2018:i:c:p:208-224