CEO Behavior and Subprime Mortgage Crisis

Guangdi Chang and Fulwood Chen

The International Journal of Business and Finance Research, 2013, vol. 7, issue 3, 13-25

Abstract: The paper addresses the subprime mortgage crisis from the perspective of the CEO of a financial firm. We integrate agency theory with the asset-pricing model to explore factors affecting CEO risk aversion. Apart from wealth and effort, the two main factors in influencing the agent’s risk preference, we also add a measure of CEO career concern to the model. Increasing peer pressure, high-incentive compensation structure, and declining market power diminish CEOs’ alertness to risk, resulting in a departure of CEO actions from firm value. For reining in CEOs’ excessive risk taking and aligning both interests of firms and CEOs, we suggest that the emphasis of the pay schedule should be adjusted according to market conditions, the relative performance evaluation be embedded into executive compensation, and the time span for performance evaluation be lengthened. The role of the board of directors and the function of risk management units should also be intensified.

Keywords: Subprime Mortgage; Financial Crisis; Incentive Structures; Peer Performance Index; Market Power (search for similar items in EconPapers)
JEL-codes: D01 G21 M52 (search for similar items in EconPapers)
Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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