Bank Monitoring and CEO Risk-Taking Incentives

52 Pages Posted: 15 Oct 2014 Last revised: 28 Jun 2017

See all articles by Anthony Saunders

Anthony Saunders

New York University - Leonard N. Stern School of Business

Keke Song

Melbourne Business School, the University of Melbourne

Date Written: October 14, 2014

Abstract

This paper investigates whether monitoring by bank lenders affects CEO incentives of borrowing firms. We find that an increase in bank monitoring incentives significantly reduce the sensitivity of CEO wealth to stock return volatility (Vega). The results are more profound when bank lenders are more powerful and reputable and have a prior lending relationship with the borrowing firms. Additionally, Vega decreases after financial covenant violations and increases when bank lenders have offsetting equity stakes in borrowing firms. These results together suggest banks have a unique role in monitoring and shaping CEO incentives to mitigate the risk-shifting incentives of firm managers.

Keywords: CEO compensation, banks, syndicated loans, monitoring, corporate governance, loan covenants

JEL Classification: G20, G21, G30, G32

Suggested Citation

Saunders, Anthony and Song, Keke, Bank Monitoring and CEO Risk-Taking Incentives (October 14, 2014). 2nd Annual Financial Institutions, Regulation and Corporate Governance Conference; 29th Australasian Finance and Banking Conference 2016. Available at SSRN: https://ssrn.com/abstract=2509906 or http://dx.doi.org/10.2139/ssrn.2509906

Anthony Saunders

New York University - Leonard N. Stern School of Business ( email )

44 West 4th Street
9-190, MEC
New York, NY 10012-1126
United States
212-998-0711 (Phone)
212-995-4220 (Fax)

Keke Song (Contact Author)

Melbourne Business School, the University of Melbourne ( email )

200 Leicester Steet
Carlton, 3053
Australia

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