Better Safe than Sorry? CEO Inside Debt and Risk-Taking in Bank Acquisitions

46 Pages Posted: 15 Oct 2013 Last revised: 3 Jun 2014

See all articles by Abhishek Srivastav

Abhishek Srivastav

University of Edinburgh - Business School

Seth Armitage

University of Edinburgh - Accounting and Finance

Jens Hagendorff

University of Edinburgh - Business School

Date Written: May 2014

Abstract

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

Srivastav, Abhishek and Armitage, Seth and Hagendorff, Jens, Better Safe than Sorry? CEO Inside Debt and Risk-Taking in Bank Acquisitions (May 2014). Available at SSRN: https://ssrn.com/abstract=2339654 or http://dx.doi.org/10.2139/ssrn.2339654

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 - Accounting and Finance ( 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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