CEO Risk Incentives and the Riskiness of Securitization Transactions in the Financial Industry
International Journal of Banking, Accounting and Finance, Forthcoming
Posted: 20 Apr 2016 Last revised: 16 Nov 2016
Date Written: April 19, 2016
The paper investigates the role of CEO risk incentives in increasing the riskiness of securitization transactions in the financial industry. Using a sample of US financial institutions, and a system model to account for the endogeneity problem between risk incentives and securitization, we document that: i) financial institutions whose CEOs had high risk incentives engaged in securitization transactions to a larger extent than did financial institutions guided by CEOs with low risk incentives, and ii) CEOs with high risk-related incentives securitized riskier loans than did CEOs with low incentives. Thus, our results suggest that CEO risk incentives induced banks to focus on securitizations and increased the riskiness of such transactions.
Keywords: Executive compensation, CEO incentives, securitization, financial crisis, banking industry, risk incentives, equity incentives, corporate governance, accounting, financial institution, securitization accounting, risk taking
JEL Classification: M41, M12, G21, G32, G01
Suggested Citation: Suggested Citation