CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. and Europe

Francesco Vallascas and Jens Hagendorff

Financial Markets, Institutions & Instruments, 2013, vol. 22, issue 2, 47-89

Abstract: We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk‐reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.

Date: 2013
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1111/fmii.12004

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:wly:finmar:v:22:y:2013:i:2:p:47-89

Access Statistics for this article

More articles in Financial Markets, Institutions & Instruments from John Wiley & Sons
Bibliographic data for series maintained by Wiley Content Delivery ().