Inside Debt, Bank Default Risk and Performance during the Crisis
FDIC Center for Financial Research Working Paper No. 2012-3
54 Pages Posted: 3 Aug 2012 Last revised: 14 Sep 2014
Date Written: February 2014
In this paper, we examine whether the structure of the chief executive officer’s (CEO) compensation package can explain default risk and performance in bank holding companies (BHCs) during the recent credit crisis. Using a sample of 371 BHCs, we show that in 2006 lower holdings of inside debt relative to equity by a CEO has an association with higher default risk and worse performance during the crisis period. We also show that inside debt is a better signal of the BHCs’ performance and default risk than inside equity measures. Finally, we provide evidence that supervisors issued favorable ratings to the lead bank in BHCs that paid their CEOs relatively higher inside debt.
Keywords: Executive compensation, financial crises, bank risk
JEL Classification: G01, G21, G28, G32
Suggested Citation: Suggested Citation