Effects of incentive pay on systemic risk: evidence from CEO compensation and CoVar

Natalya Zelenyuk and Robert Faff

Empirical Economics, 2022, vol. 63, issue 6, No 17, 3289-3311

Abstract: Abstract We examine the role of chief executive officers’ (CEO) pay in contribution to systemic risk in the USA. In particular, by extending the CoVar model of Adrian and Brunnermeier (Am Econ Rev 106(7):1705–1741, 2016), we document that the systemic risk measure of dollar delta CoVar is positively influenced by CEO pay. Differentiation between the types of CEO pay incentives suggests that bonus and option awards comprise major contribution to systemic risk. It follows that governance measures that are aimed at systemic risk management can benefit from distinguishing between short-term and long-term CEO incentives.

Keywords: Financial crises; Financial risk and Risk management; CEO incentives; CEO compensation (search for similar items in EconPapers)
JEL-codes: G01 G20 G21 G32 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1007/s00181-022-02236-2

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