Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis

Patricia Boyallian; Pablo Ruiz-Verdú

doi:10.1093/rof/rfx051

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Review of Finance Vol. 22 No. 5 2018

Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis

Patricia Boyallian¹; Pablo Ruiz-Verdú²

¹ Lancaster University Management School · ² Department of Business Administration, Universidad Carlos III de Madrid

open access

Abstract

Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO’s wealth to his firm’s stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large US financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007–10 financial crisis in highly levered firms, but not in less levered firms.

DOI: 10.1093/rof/rfx051
Volume: 22
Issue: 5
Pages: 1763-1805
Language: en
Sources: bibtex:phds-export.bib openalex crossref

Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis

Abstract

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