Journal of Banking & Finance Vol. 30 No. 3 2006

Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry

Carl R. Chen¹; Thomas L. Steiner²; Ann Marie Whyte³

¹ University of Dayton · ² Steiner Consulting Group, Dayton, OH, United States · ³ University of Central Florida

Abstract

We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks.

DOI

10.1016/j.jbankfin.2005.06.004

Volume

30

Issue

3

Pages

915-945

Language

en

Sources

openalex crossref bibtex:phds-export.bib

Cite

APA 7 MLA 9 Chicago (author–date) Harvard Elsevier Harvard (JFE, JBF…) The Accounting Review Academy of Management American Marketing Association INFORMS (Management Science) Copy citation Copied ✓