Abstract

http://ssrn.com/abstract=1914542
 
 

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The Probability of Default, Excessive Risk, and Executive Compensation: A Study of Financial Services Firms from 1995 to 2008


Columbia Business School Submitter


Columbia University - Columbia Business School

Bruce Kogut


Columbia Business School - Management

Hitesh Harnal


affiliation not provided to SSRN

February 1, 2010

Columbia Business School Research Paper

Abstract:     
The financial crisis of 2008 has many causes, with the role of executive compensation in creating excessive risk taking being frequently cited in the press and by policy makers as a leading candidate. The evidence for or against is scarce. This paper assembles panel data on 117 financial firms from 1995 through 2008, using the financial crisis as a type of ‘stress test’ experiment to determine the relation of equity-based incentives on the probability of default. After estimating default probabilities using a Heston-Nandi specification, we apply a dynamic panel model to estimate statistically the effect of compensation on default risk. The results indicate uniformly that equity-based pay (i.e. restricted stock and options) increases the probability of default, while non-equity pay (i.e. cash bonuses) decreases it. The results are robust across all specifications estimated.

Number of Pages in PDF File: 69

Keywords: financial crisis, executive compensation, equity-based incentives

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Date posted: August 23, 2011 ; Last revised: September 19, 2011

Suggested Citation

Submitter, Columbia Business School and Kogut, Bruce and Harnal, Hitesh, The Probability of Default, Excessive Risk, and Executive Compensation: A Study of Financial Services Firms from 1995 to 2008 (February 1, 2010). Columbia Business School Research Paper. Available at SSRN: http://ssrn.com/abstract=1914542 or http://dx.doi.org/10.2139/ssrn.1914542

Contact Information

Columbia Business School Submitter (Contact Author)
Columbia University - Columbia Business School ( email )
3022 Broadway
New York, NY 10027
United States
Bruce Kogut
Columbia Business School - Management ( email )
3022 Broadway
New York, NY 10027
United States

Hitesh Harnal
affiliation not provided to SSRN
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Citations:  11

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