Leverage, CEO Risk-Taking Incentives and Bank Failure during the 2007-2010 Financial Crisis

A revised version of this paper has been accepted for publication in the Review of Finance. Published by Oxford University Press.

51 Pages Posted: 7 Mar 2015 Last revised: 27 Nov 2017

See all articles by Patricia Boyallian

Patricia Boyallian

Lancaster University - Department of Accounting and Finance

Pablo Ruiz-Verdú

Universidad Carlos III de Madrid

Date Written: June 10, 2016

Abstract

Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO's wealth to his firm's stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large U.S. financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007-2010 financial crisis in highly levered firms, but not in less levered firms.

Keywords: executive compensation, risk-taking incentives, leverage, risk shifting, bank governance, financial crisis

JEL Classification: G30, G34, G21, G32, M12

Suggested Citation

Boyallian, Patricia and Ruiz-Verdú, Pablo, Leverage, CEO Risk-Taking Incentives and Bank Failure during the 2007-2010 Financial Crisis (June 10, 2016). A revised version of this paper has been accepted for publication in the Review of Finance. Published by Oxford University Press., Available at SSRN: https://ssrn.com/abstract=2571332 or http://dx.doi.org/10.2139/ssrn.2571332

Patricia Boyallian

Lancaster University - Department of Accounting and Finance ( email )

The Management School
Lancaster LA1 4YX
United Kingdom

Pablo Ruiz-Verdú (Contact Author)

Universidad Carlos III de Madrid ( email )

Calle Madrid 126
Getafe, Madrid 28903
Spain
+34 91 624 5801 (Phone)
+34 91 624 9607 (Fax)

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