Inside Debt and Bank Risk

49 Pages Posted: 24 Sep 2010 Last revised: 24 Oct 2014

Date Written: March 14, 2014

Abstract

Inside debt compensation held by top officers of U.S. banks is negatively related to risk and risk-taking. The evidence reveals a robust and strongly negative relation between end-of-2006 inside debt and 2007-2009 bank-specific risk exposures in terms of lost stock market value, volatility, tail risk, and the probability of financial distress. Banks with managers having large inside debt holdings are also characterized by better-quality assets, more conservative balance sheet management, and a stronger tendency towards traditional banking activities. The results suggest that debt-based compensation limits bank risk and risk-taking by encouraging more conservative decision-making.

Keywords: Executive Compensation, Risk Management, Inside debt, Financial Institutions

JEL Classification: G21, G28, G30, G34, J33

Suggested Citation

van Bekkum, Sjoerd, Inside Debt and Bank Risk (March 14, 2014). Journal of Financial and Quantitative Analysis (JFQA), Forthcoming. Available at SSRN: https://ssrn.com/abstract=1682139 or http://dx.doi.org/10.2139/ssrn.1682139

Sjoerd Van Bekkum (Contact Author)

Erasmus University ( email )

P.O. Box 1738
Rotterdam, NL 3062 PA
Netherlands

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