CEO inside debt and hedging decisions: Lessons from the U.S. banking industry

Mohamed Belkhir () and Sabri Boubaker

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Abstract: Theoretical literature (0170 and 0095) argues that inside debt – pension benefits and deferred compensation – has debt-like payoffs, and can therefore curb executives' excessive risk-taking incentives created by equity holdings. We test this theory in the banking sector by investigating whether CEOs with larger inside debt holdings compared to their equity-based compensation hedge more their banks' interest rate risk. Our results show that CEO inside debt holdings have a positive effect on the extent to which a bank uses interest rate derivatives for hedging purposes, implying that debt-like compensation mitigates bank executives' risk-taking incentives. Our results have important implications for financial regulation attempting to prevent financial crises due, at least partially, to perverse incentives provided to bank executives through compensation.

Keywords: Inside debt; Executive compensation; Bank risk; Hedging; Financial regulation (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (15)

Published in Journal of International Financial Markets, Institutions and Money, 2013, 24 (1), pp.223-246

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:hal-01155502

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