Managerial risk-taking incentives and the systemic risk of financial institutions

Jamshed Iqbal () and Sami Vähämaa
Additional contact information
Jamshed Iqbal: University of Vaasa

Review of Quantitative Finance and Accounting, 2019, vol. 53, issue 4, No 10, 1229-1258

Abstract: Abstract This paper examines whether the systemic risk of financial institutions is associated with the risk-taking incentives generated by executive compensation. We measure managerial risk-taking incentives with the sensitivities of chief executive officer (CEO) and chief financial officer (CFO) compensation to changes in stock prices (pay-performance sensitivity) and stock return volatility (pay-risk sensitivity). Using data on large U.S. financial institutions over the period 2005–2010, we document a negative association between systemic risk and the sensitivities of CEO and CFO compensation to stock return volatility. However, our results also demonstrate that financial institutions with greater managerial risk-taking incentives were associated with significantly higher levels of systemic risk during the peak of the financial crisis in 2008. We further document that the relation between pay-performance sensitivity and systemic risk is essentially nonexistent. Overall, our empirical findings indicate that the association between managerial risk-taking incentives and banks’ systemic risk is ambiguous and is not stable over time.

Keywords: Executive compensation; Risk-taking incentives; Systemic risk; Bank risk-taking; Financial crisis (search for similar items in EconPapers)
JEL-codes: G01 G20 G21 G30 G32 G34 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://link.springer.com/10.1007/s11156-018-0780-z Abstract (text/html)
Access to full text is restricted to subscribers.

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:kap:rqfnac:v:53:y:2019:i:4:d:10.1007_s11156-018-0780-z

Ordering information: This journal article can be ordered from
http://www.springer.com/finance/journal/11156/PS2

DOI: 10.1007/s11156-018-0780-z

Access Statistics for this article

Review of Quantitative Finance and Accounting is currently edited by Cheng-Few Lee

More articles in Review of Quantitative Finance and Accounting from Springer
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().