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CEO Pay Incentives and Risk-Taking: Evidence from Bank Acquisitions

Journal of Corporate Finance, Forthcoming

Posted: 18 Jun 2010 Last revised: 24 Oct 2011

Jens Hagendorff

University of Edinburgh - Business School

Francesco Vallascas

University of Leeds - Division of Accounting and Finance

Date Written: January 13, 2011

Abstract

We analyze how the structure of executive compensation affects the risk choices made by bank CEOs. For a sample of acquiring US 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

JEL Classification: G21, G34, G33, J33

Suggested Citation

Hagendorff, Jens and Vallascas, Francesco, CEO Pay Incentives and Risk-Taking: Evidence from Bank Acquisitions (January 13, 2011). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1625689

Jens Hagendorff (Contact Author)

University of Edinburgh - Business School ( email )

University of Edinburgh
29 Buccleuch Place
Edinburgh, Scotland EH8 9JS
UNITED KINGDOM

Francesco Vallascas

University of Leeds - Division of Accounting and Finance ( email )

Leeds LS2 9JT
United Kingdom

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