CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. And Europe

43 Pages Posted: 20 Apr 2013

See all articles by Francesco Vallascas

Francesco Vallascas

Durham University

Jens Hagendorff

University of Edinburgh - Business School

Date Written: May 2013

Abstract

We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk‐reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.

Keywords: banks, bonus compensation, default risk, executive compensation

JEL Classification: G21, G33, J33

Suggested Citation

Vallascas, Francesco and Hagendorff, Jens, CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. And Europe (May 2013). Financial Markets, Institutions & Instruments, Vol. 22, Issue 2, pp. 47-89, 2013, Available at SSRN: https://ssrn.com/abstract=2254172 or http://dx.doi.org/10.1111/fmii.12004

Francesco Vallascas (Contact Author)

Durham University ( email )

Mill Hill Lane
Durham, DH1 3LB
United Kingdom

Jens Hagendorff

University of Edinburgh - Business School ( email )

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

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