CEO pay incentives and risk-taking: Evidence from bank acquisitions

Jens Hagendorff and Francesco Vallascas

Journal of Corporate Finance, 2011, vol. 17, issue 4, 1078-1095

Abstract: We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring U.S. banks, we employ the Merton distance to default model to show that CEOs with higher pay-risk sensitivity engage in risk-inducing mergers. Our findings are driven by two types of acquisitions: acquisitions completed during the last decade (after bank deregulation had expanded banks' risk-taking opportunities) and acquisitions completed by the largest banks in our sample (where shareholders benefit from [`]too big to fail' support by regulators and gain most from shifting risk to other stakeholders). Our results control for CEO pay-performance sensitivity and offer evidence consistent with a causal link between financial stability and the risk-taking incentives embedded in the executive compensation contracts at banks.

Keywords: Banks; Mergers; Default; risk; CEO; compensation (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (93)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:17:y:2011:i:4:p:1078-1095

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