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

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 ex...

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Bibliographic Details
Published inJournal of banking & finance Vol. 30; no. 3; pp. 915 - 945
Main Authors Chen, Carl R., Steiner, Thomas L., Whyte, Ann Marie
Format Journal Article
LanguageEnglish
Published Amsterdam Elsevier B.V 01.03.2006
Elsevier
Elsevier Sequoia S.A
SeriesJournal of Banking & Finance
Subjects
Bank management
Banking
Banking industry
Behavioral decision theory
Business economics
Business management
Commercial banks
Correlation analysis
Empirical tests
Executive compensation
Executives
Hypotheses
Investment policy
Options on stocks
Risk
Risk management
Risk-taking
Senior management
Stock options
Studies
J33
Executive compensation
Risk-taking
G21
Banking industry
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Summary: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.
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ISSN:0378-4266
1872-6372
DOI:10.1016/j.jbankfin.2005.06.004