Better Safe than Sorry? CEO Inside Debt and Risk-Taking in Bank Acquisitions
46 Pages Posted: 15 Oct 2013 Last revised: 3 Jun 2014
Date Written: May 2014
Widespread losses during the recent financial crisis have increased concerns that equity-based compensation for bank CEOs causes excessive risk-taking by banks. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky policies. We find a negative relationship between CEO inside debt and the change in default risk following acquisitions. The same results apply when risk is measured by the exposure to loss of taxpayers. The results provide further evidence that executive remuneration is an important area for creditors and policymakers concerned about bank risk-taking.
Keywords: banks, inside debt, CEO incentives, default risk, mergers and acquisitions
JEL Classification: G21, G34, J33
Suggested Citation: Suggested Citation