CEO Compensation and Risk-Taking at Financial Firms: Evidence from U.S. Federal Loan Assistance

53 Pages Posted: 24 Jun 2011 Last revised: 6 Sep 2017

See all articles by Amar Gande

Amar Gande

Southern Methodist University (SMU) - Finance Department

Swaminathan L. Kalpathy

Texas Christian University - M.J. Neeley School of Business

Date Written: July 1, 2017

Abstract

We examine whether risk-taking among the largest financial firms in the U.S. is related to CEO equity incentives before the 2008 financial crisis. Using data on U.S. Federal Reserve emergency loans provided to these firms, we find that the amount of emergency loans and total days the loans are outstanding are increasing in pre-crisis CEO risk-taking incentives – “vega.” Our results are robust to accounting for endogeneity in CEO equity incentives and selection of financial firms into emergency loan programs. We also rule out the possibility that our results are driven by a bank’s funding base, bank complexity, CEO overconfidence, or matching of CEOs to select banks. We conclude that equity incentives (vega) embedded in CEO compensation contracts were positively associated with risk-taking in financial firms which resulted in potential solvency problems. We also find some evidence, although somewhat weaker, that higher incentive alignment (“delta”) mitigated such problems in those financial firms.

Keywords: CEO Compensation, CEO Incentives, Financial Crisis, Financial Deregulation, Federal Emergency Loans

JEL Classification: G01, G21, G32, J33, M12, M52

Suggested Citation

Gande, Amar and Kalpathy, Swaminathan L., CEO Compensation and Risk-Taking at Financial Firms: Evidence from U.S. Federal Loan Assistance (July 1, 2017). Journal of Corporate Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1865870 or http://dx.doi.org/10.2139/ssrn.1865870

Amar Gande

Southern Methodist University (SMU) - Finance Department ( email )

United States
2147681945 (Phone)
2147684099 (Fax)

Swaminathan L. Kalpathy (Contact Author)

Texas Christian University - M.J. Neeley School of Business ( email )

Fort Worth, TX 76129
United States

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