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Debt Incentives and Bank Risk‐Taking

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  • Yongqiang Chu
  • Mingming Qiu

Abstract

We examine how executive pension and deferred compensation plans affect bank risk‐taking. We show that banks with more inside debt incentives are 5–6% less likely to approve risky mortgages. Using state individual tax rates as instruments, we show that the effect is likely to be causal. Further evidence shows that the effect comes mainly from executive pension plans. This result is robust and statistically significant after controlling for other potential reasons affecting mortgage origination and various fixed effects.

Suggested Citation

  • Yongqiang Chu & Mingming Qiu, 2021. "Debt Incentives and Bank Risk‐Taking," Real Estate Economics, American Real Estate and Urban Economics Association, vol. 49(3), pages 778-808, September.
    • Handle: RePEc:bla:reesec:v:49:y:2021:i:3:p:778-808
    DOI: 10.1111/1540-6229.12279
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    References listed on IDEAS

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    1. Lai, Shaojie & Liu, Shiang & Wang, Qing Sophie, 2023. "Déjà Vu: CEO overconfidence and bank mortgage lending in the post-financial crisis period," Journal of Behavioral and Experimental Finance, Elsevier, vol. 39(C).

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