CEO option compensation and systemic risk in the banking industry

Jeong-Bon Kim, Li Li, Mary L. Z. Ma and Frank Song

Asia-Pacific Journal of Accounting & Economics, 2016, vol. 23, issue 2, 131-160

Abstract: We document that CEO risk-taking incentives induced by stock option compensation increase a bank’s contribution to systemic distress risk and systemic crash risk through reacting to common risk exposure of the banking industry. We also find that this relation operates through channels of engagement in non-interest income-generating activities and maturity mismatch associated with short-term debt financing. Further analysis reveals that CEO option-based risk-taking incentives increase investments in innovative financial products that form naturally interconnected networks, which increase systemic risk. Finally, we show that market illiquidity and financial crisis accentuate the relation between CEO risk-taking incentives and systemic risk.

Date: 2016
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DOI: 10.1080/16081625.2016.1155250

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Asia-Pacific Journal of Accounting & Economics is currently edited by Yin-Wong Cheung, Hong Hwang, Jeong-Bon Kim, Shu-Hsing Li and Suresh Radhakrishnan

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