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
Date Written: June 10, 2016
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: Suggested Citation