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Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis*

Endogenous matching and the empirical determinants of contract form

Patricia Boyallian and Pablo Ruiz-Verdú

Review of Finance, 2018, vol. 22, issue 5, 1763-1805

Abstract: Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO’s wealth to his firm’s stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large US financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007–10 financial crisis in highly levered firms, but not in less levered firms.

Keywords: Executive compensation; Risk-taking incentives; Leverage; Banks; Financial crisis (search for similar items in EconPapers)
Date: 2018
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Citations: View citations in EconPapers (1)

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