CEO Inside Debt Holdings and Risk-Shifting: Evidence from Bank Payout Policies

45 Pages Posted: 14 Apr 2013 Last revised: 16 Jan 2017

See all articles by Abhishek Srivastav

Abhishek Srivastav

University of Edinburgh - Business School

Seth Armitage

University of Edinburgh

Jens Hagendorff

University of Edinburgh - Business School

Date Written: April 1, 2014

Abstract

Bank payouts divert cash to shareholders, while leaving behind riskier and less liquid assets to repay debt holders in the future. Bank payouts, therefore, constitute a type of risk-shifting that benefits equity holders at the expense of debt holders. In this paper, we provide insights on how incentives stemming from inside debt impact bank payout policy in a manner that protects debt holder interests. We show that CEOs with higher inside debt relative to inside equity are associated with more conservative bank payout policies. Specifically, CEOs paid with more inside debt are more likely to cut payouts and to cut payouts by a larger amount. Reductions in payouts occur through a decrease in both dividends and repurchases. Our results also hold over a subsample of TARP banks where we expect the link between risk-shifting and payouts to be of particular relevance because it involves wealth transfers from the taxpayer to equity holders. We conclude that inside debt can help in addressing risk-shifting concerns by aligning the interests of CEOs with those of creditors, regulators, and in the case of TARP banks, the taxpayer.

Keywords: banks, inside debt, CEO incentives, payout, dividends

JEL Classification: G21, G28, G34, J33

Suggested Citation

Srivastav, Abhishek and Armitage, Seth and Hagendorff, Jens, CEO Inside Debt Holdings and Risk-Shifting: Evidence from Bank Payout Policies (April 1, 2014). Available at SSRN: https://ssrn.com/abstract=2249732 or http://dx.doi.org/10.2139/ssrn.2249732

Abhishek Srivastav (Contact Author)

University of Edinburgh - Business School ( email )

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

Seth Armitage

University of Edinburgh ( email )

29 Buccleuch Place
Edinburgh, EH8 9JS
United Kingdom
44 131 650 3794 (Phone)

Jens Hagendorff

University of Edinburgh - Business School ( email )

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

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