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CEO Behavior and Subprime Mortgage Crisis

Author

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  • Guangdi Chang
  • Fulwood Chen

Abstract

The paper addresses the subprime mortgage crisis from the perspective of the CEO of a financial firm. We integrate agency theory with the asset-pricing model to explore factors affecting CEO risk aversion. Apart from wealth and effort, the two main factors in influencing the agent’s risk preference, we also add a measure of CEO career concern to the model. Increasing peer pressure, high-incentive compensation structure, and declining market power diminish CEOs’ alertness to risk, resulting in a departure of CEO actions from firm value. For reining in CEOs’ excessive risk taking and aligning both interests of firms and CEOs, we suggest that the emphasis of the pay schedule should be adjusted according to market conditions, the relative performance evaluation be embedded into executive compensation, and the time span for performance evaluation be lengthened. The role of the board of directors and the function of risk management units should also be intensified.

Suggested Citation

  • Guangdi Chang & Fulwood Chen, 2013. "CEO Behavior and Subprime Mortgage Crisis," The International Journal of Business and Finance Research, The Institute for Business and Finance Research, vol. 7(3), pages 13-25.
    • Handle: RePEc:ibf:ijbfre:v:7:y:2013:i:3:p:13-25
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    References listed on IDEAS

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    Cited by:

    1. Emmanuel Iatridis, George, 2018. "Accounting discretion and executive cash compensation: An empirical investigation of corporate governance, credit ratings and firm value," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 55(C), pages 29-49.

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    More about this item

    Keywords

    Subprime Mortgage; Financial Crisis; Incentive Structures; Peer Performance Index; Market Power;
    All these keywords.

    JEL classification:

    • D01 - Microeconomics - - General - - - Microeconomic Behavior: Underlying Principles
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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