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Risk-taking Incentives, Governance,and Losses in the Financial Crisis

Author

Listed:
  • Marc CHESNEY

    (University of Zurich and Swiss Finance Institute)

  • Jacob STROMBERG

    (University of Zurich (SFI Ph.D. program))

  • Alexander F. WAGNER

    (University of Zurich, Swiss Finance Institute and Harvard University)

Abstract

This paper studies the extent to which risk-taking incentives of CEOs and other governance features in a range of years prior to the recent financial crisis were related to the write-downs of U.S. financial institutions during the crisis. We document that institutions whose CEOs had particularly strong risk-taking incentives, weak ownership incentives and independent boards had the highest write-downs, both in absolute terms and relative to total assets. Furthermore, financial institutions with lower Tier-1 ratios and those with CEOs who earned less than their colleagues at comparable firms had larger write-downs.

Suggested Citation

  • Marc CHESNEY & Jacob STROMBERG & Alexander F. WAGNER, 2010. "Risk-taking Incentives, Governance,and Losses in the Financial Crisis," Swiss Finance Institute Research Paper Series 10-18, Swiss Finance Institute, revised Jul 2010.
    • Handle: RePEc:chf:rpseri:rp1018
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    Citations

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    Cited by:

    1. Louhichi, Awatef & Boujelbene, Younes, 2017. "Bank capital, lending and financing behaviour of dual banking systems," Journal of Multinational Financial Management, Elsevier, vol. 41(C), pages 61-79.
    2. Cerasi, Vittoria & Deininger, Sebastian M. & Gambacorta, Leonardo & Oliviero, Tommaso, 2020. "How post-crisis regulation has affected bank CEO compensation," Journal of International Money and Finance, Elsevier, vol. 104(C).
    3. Hamid Mehran & Alan Morrison & Joel Shapiro, 2011. "Corporate governance and banks: what have we learned from the financial crisis?," Staff Reports 502, Federal Reserve Bank of New York.
    4. Efing, Matthias & Hau, Harald & Kampkötter, Patrick & Steinbrecher, Johannes, 2015. "Incentive pay and bank risk-taking: Evidence from Austrian, German, and Swiss banks," Journal of International Economics, Elsevier, vol. 96(S1), pages 123-140.
    5. Wagner, Alexander F., 2011. "Board independence and competence," Journal of Financial Intermediation, Elsevier, vol. 20(1), pages 71-93, January.
    6. Bhagat, Sanjai & Bolton, Brian & Lu, Jun, 2015. "Size, leverage, and risk-taking of financial institutions," Journal of Banking & Finance, Elsevier, vol. 59(C), pages 520-537.
    7. Tom Berglund, 2012. "Restricting Risk-taking by Financial Intermediaries through Executive Compensation," Chapters, in: James R. Barth & Chen Lin & Clas Wihlborg (ed.), Research Handbook on International Banking and Governance, chapter 11, Edward Elgar Publishing.
    8. Eufinger, Christian & Gill, Andrej, 2016. "Incentive-based capital requirements," SAFE Working Paper Series 9 [rev.], Leibniz Institute for Financial Research SAFE, revised 2016.

    More about this item

    Keywords

    Executive compensation; Subprime crisis; Write-downs; Corporate governance; Managerial incentives; Risk-taking; Too big to fail;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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