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Is option-based compensation restrained by largest potential risk exposure? Evidence from the banking industry

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  • Fung, Michael K.

Abstract

Excessive risk taking induced by equity-based executive compensation is more (less) of a concern to the shareholders if the largest potential risk exposure is large (small). This study empirically shows that the intensity of option-based compensation to a bank’s CEO decreases with the bank’s largest potential risk exposure and its largest potential increase in risk exposure. These findings suggest a possibility of banks self-regulating their compensation structures.

Suggested Citation

  • Fung, Michael K., 2020. "Is option-based compensation restrained by largest potential risk exposure? Evidence from the banking industry," Economics Letters, Elsevier, vol. 191(C).
    • Handle: RePEc:eee:ecolet:v:191:y:2020:i:c:s0165176520300793
    DOI: 10.1016/j.econlet.2020.109084
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    References listed on IDEAS

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    1. Bhagat, Sanjai & Bolton, Brian, 2014. "Financial crisis and bank executive incentive compensation," Journal of Corporate Finance, Elsevier, vol. 25(C), pages 313-341.
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    4. Chen, Carl R. & Steiner, Thomas L. & Whyte, Ann Marie, 2006. "Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry," Journal of Banking & Finance, Elsevier, vol. 30(3), pages 915-945, March.
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    More about this item

    Keywords

    Executive compensation; Banking; Risk;
    All these keywords.

    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G3 - Financial Economics - - Corporate Finance and Governance

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