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CEO Behavior and Subprime Mortgage Crisis

27 Pages Posted: 28 Feb 2011  

Guangdi Gordon Chang

National Taiwan University of Science and Technology

Fulwood Chen

National Taiwan University of Science and Technology

Date Written: February, 28 2011

Abstract

The paper integrates agency theory with the asset-pricing model to explore causes of subprime mortgage crisis regarding the role of CEOs in financial firms. When maximizing their interests, CEOs behave under the influence of incentive structures, peer pressure and market power. Increasing peer pressure, high-incentive compensation schedule and declining market power increase CEOs’ appetite for risk. For avoiding CEOs’ procyclical behavior and aligning the interests of both firms and CEOs, we conclude that pay incentives could be reversed against the changes in market conditions; the relative performance evaluation be embedded into CEOs’ compensation schedule; the time span for performance evaluation be lengthened.

Keywords: subprime mortgage, financial crisis, incentive structures, peer performance index, market power

JEL Classification: D01, G21, M52

Suggested Citation

Chang, Guangdi Gordon and Chen, Fulwood, CEO Behavior and Subprime Mortgage Crisis (February, 28 2011). Available at SSRN: https://ssrn.com/abstract=1772769 or http://dx.doi.org/10.2139/ssrn.1772769

Guangdi Gordon Chang (Contact Author)

National Taiwan University of Science and Technology ( email )

Keelung Road
Sec 43
Taipei
Taiwan

Fulwood Chen

National Taiwan University of Science and Technology ( email )

Keelung Road
Sec 43
Taipei
Taiwan

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