Hostname: page-component-8448b6f56d-xtgtn Total loading time: 0 Render date: 2024-04-24T20:50:33.042Z Has data issue: false hasContentIssue false
  • English
  • Français

Inside Debt and Bank Risk

Published online by Cambridge University Press:  10 June 2016

Sjoerd van Bekkum
Sjoerd van Bekkum*
Affiliation:
vanbekkum@ese.eur.nl, Erasmus University, Erasmus School of Economics, Rotterdam, 3000 DR, Netherlands.
*
*Corresponding author: vanbekkum@ese.eur.nl
Get access Rights & Permissions [Opens in a new window]

Abstract

Inside debt compensation held by top officers of U.S. banks is negatively related to risk and risk taking. The evidence reveals a robust and strongly negative relation between end-of-2006 inside debt and 2007–2009 bank-specific risk exposures in terms of lost stock market value, volatility, tail risk, and the probability of financial distress. Banks with managers having large inside debt holdings are also characterized by better-quality assets, more conservative balance sheet management, and a stronger tendency toward traditional banking activities. The results suggest that debt-based compensation limits bank risk and risk taking by encouraging more conservative decision making.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 359 - 385
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Acharya, V.; Philippon, T.; Richardson, M.; and Roubini, N.. “The Financial Crisis of 2007–2009: Causes and Remedies.” In Restoring Financial Stability: How to Repair a Failed System, Acharya, V. and Richardson, M., eds. Hoboken, NJ: John Wiley & Sons (2009).CrossRefGoogle Scholar
Adrian, T., and Shin, H.. “Liquidity and Leverage.” Journal of Financial Intermediation, 19 (2010), 418–437.CrossRefGoogle Scholar
Aggarwal, R., and Samwick, A.. “Performance Incentives within Firms: The Effect of Managerial Responsibility.” Journal of Finance, 58 (2003), 1613–1649.CrossRefGoogle Scholar
Altman, E. “Predicting Financial Distress of Companies: Revisiting the Z-Score and ZETA Models.” Working Paper, New York University (2000).Google Scholar
Ameriks, J., and Zeldes, S. P.. “How Do Household Portfolio Shares Vary with Age?” Working Paper, Columbia University (2004).Google Scholar
Anantharaman, D.; Fang, V.; and Gong, G.. “Inside Debt and the Design of Corporate Debt Contracts.” Management Science, 60 (2014), 1260–1280.CrossRefGoogle Scholar
Anantharaman, D., and Lee, Y. G.. “Managerial Risk Taking Incentives and Corporate Pension Policy.” Journal of Financial Economics, 111 (2014), 328–351.CrossRefGoogle Scholar
Angrist, J. D., and Pischke, J.-S.. Mostly Harmless Econometrics: An Empiricist’s Companion. Princeton, NJ: Princeton University Press (2008).CrossRefGoogle Scholar
Artzner, P.; Delbaen, F.; Eber, J.; and Heath, D.. “Coherent Measures of Risk.” Mathematical Finance, 9 (1999), 203–228.CrossRefGoogle Scholar
Balachandran, S.; Kogut, B.; and Harnal, H.. “The Probability of Default, Excessive Risk, and Executive Compensation: A Study of Financial Services Firms from 1995 to 2008.” Working Paper, Columbia University (2010).CrossRefGoogle Scholar
Bali, T.; Demirtas, K.; and Levy, H.. “Is There an Intertemporal Relation between Downside Risk and Expected Returns?” Journal of Financial and Quantitative Analysis, 44 (2009), 883–909.CrossRefGoogle Scholar
Bebchuk, L.; Fried, J.; and Walker, D.. “Managerial Power and Rent Extraction in the Design of Executive Compensation.” University of Chicago Law Review, 69 (2002), 751–846.CrossRefGoogle Scholar
Bebchuk, L., and Spamann, H.. “Regulating Bankers’ Pay.” Georgetown Law Journal, 98 (2010), 247–287.Google Scholar
Beltratti, A., and Stulz, R.. “The Credit Crisis around the Globe: Why Did Some Banks Perform Better?” Journal of Financial Economics, 105 (2012), 1–17.CrossRefGoogle Scholar
Bennett, R.; Güntay, L.; and Unal, H.. “Inside Debt, Bank Default Risk, and Performance during the Crisis.” Journal of Financial Intermediation, 24 (2015), 487–513.CrossRefGoogle Scholar
Berger, A. N.; Kick, T.; and Schaeck, K.. “Executive Board Composition and Bank Risk Taking.” Journal of Corporate Finance, 28 (2014), 48–65.CrossRefGoogle Scholar
Billett, M. T., and Qian, Y.. “Are Overconfident CEOs Born or Made? Evidence of Self-Attribution Bias from Frequent Acquirers.” Management Science, 54 (2008), 1037–1051.CrossRefGoogle Scholar
Black, F., and Scholes, M.. “The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637–654.CrossRefGoogle Scholar
Bolton, P.; Mehran, H.; and Shapiro, J.. “Executive Compensation and Risk Taking.” Review of Finance, 19 (2015), 2139–2181.CrossRefGoogle Scholar
Brunnermeier, M. “Deciphering the Liquidity and Credit Crunch 2007–2008.” Journal of Economic Perspectives, 23 (2009), 77–100.CrossRefGoogle Scholar
Brunnermeier, M., and Adrian, T.. “CoVaR.” Working Paper, Federal Reserve Bank of New York (2009).Google Scholar
Brunnermeier, M., and Pedersen, L.. “Market Liquidity and Funding Liquidity.” Review of Financial Studies, 22 (2008), 2201–2238.CrossRefGoogle Scholar
Carpenter, J.; Cooley, T.; and Walter, I.. “Reforming Compensation and Corporate Governance.” In Regulating Wall Street: The New Architecture of Global Finance, Acharya, V. V., Cooley, T. F., Richardson, M. P., and Walter, I., eds. Hoboken, NJ: John Wiley & Sons (2011).Google Scholar
Cassell, C.; Huang, S.; Sanchez, J.; and Stuart, M.. “Seeking Safety: The Relation between CEO Inside Debt Holdings and the Riskiness of Firm Investment and Financial Policies.” Journal of Financial Economics, 103 (2012), 588–610.CrossRefGoogle Scholar
Chava, S.; Kumar, P.; and Warga, A.. “Managerial Agency and Bond Covenants.” Review of Financial Studies, 23 (2010), 1120–1148.CrossRefGoogle Scholar
Chava, S., and Purnanandam, A.. “CEOs versus CFOs: Incentives and Corporate Policies.” Journal of Financial Economics, 97 (2010), 263–278.CrossRefGoogle Scholar
Chen, F.; Dou, Y.; and Wang, X.. “Executive Inside Debt Holdings and Creditors’ Demand for Pricing and Non-Pricing Protections.” Working Paper, Chinese University of Hong Kong (2010).CrossRefGoogle Scholar
Cheng, I.; Hong, H.; and Scheinkman, J.. “Yesterday’s Heroes: Compensation and Creative Risk-Taking.” Working Paper, Princeton University (2012).Google Scholar
Chesney, M.; Stromberg, J.; and Wagner, A. F.. “Managerial Incentives to Take Asset Risk.” Working Paper, Swiss Finance Institute–University of Zurich (2012).Google Scholar
Coles, J.; Daniel, N.; and Naveen, L.. “Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431–468.CrossRefGoogle Scholar
DeYoung, R.; Peng, E. Y.; and Yan, M.. “Executive Compensation and Business Policy Choices at U.S. Commercial Banks.” Journal of Financial and Quantitative Analysis, 48 (2013), 165–196.CrossRefGoogle Scholar
DeYoung, R., and Roland, K. P.. “Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model.” Journal of Financial Intermediation, 10 (2001), 54–84.CrossRefGoogle Scholar
Doukas, J. A., and Petmezas, D.. “Acquisitions, Overconfident Managers and Self-Attribution Bias.” European Financial Management, 13 (2007), 531–577.CrossRefGoogle Scholar
Edmans, A., and Gabaix, X.. “The Effect of Risk on the CEO Market.” Review of Financial Studies, 24 (2011), 2822–2863.CrossRefGoogle Scholar
Edmans, A., and Liu, Q.. “Inside Debt.” Review of Finance, 15 (2011), 75–102.CrossRefGoogle Scholar
Fahlenbrach, R.; Prilmeier, R.; and Stulz, R.. “This Time Is the Same: Using Bank Performance in 1998 to Explain Bank Performance during the Recent Financial Crisis.” Journal of Finance, 67 (2012), 2139–2185.CrossRefGoogle Scholar
Fahlenbrach, R., and Stulz, R.. “Bank CEO Incentives and the Credit Crisis.” Journal of Financial Economics, 99 (2011), 11–26.CrossRefGoogle Scholar
Fama, E. F., and French, K. R.. “Common Risk Factors in the Returns on Stocks and Bonds.” Journal of Financial Economics, 33 (1993), 3–56.CrossRefGoogle Scholar
Forbes, D. P. “Are Some Entrepreneurs More Overconfident Than Others?” Journal of Business Venturing, 20 (2005), 623–640.CrossRefGoogle Scholar
Fostel, A., and Geanakoplos, J.. “Leverage Cycles and the Anxious Economy.” American Economic Review, 98 (2008), 1211–1244.CrossRefGoogle Scholar
Gabaix, X., and Landier, A.. “Why Has CEO Pay Increased So Much?” Quarterly Journal of Economics, 123 (2008), 49–100.CrossRefGoogle Scholar
Graham, J. R.; Harvey, C. R.; and Puri, M.. “Managerial Attitudes and Corporate Actions.” Journal of Financial Economics, 109 (2013), 103–121.CrossRefGoogle Scholar
Guay, W. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 43–72.CrossRefGoogle Scholar
Guldimann, T.; Zangari, P.; Longerstaey, J.; Matero, J.; and Howard, S.. RiskMetrics Technical Document. New York, NY: JP Morgan (1994).Google Scholar
He, Z.; Khang, I.; and Krishnamurthy, A.. “Balance Sheet Adjustments in the 2008 Crisis.” Working Paper, University of Chicago (2010).CrossRefGoogle Scholar
Heckman, J. “Sample Selection Bias as a Specification Error.” Econometrica, 47 (1979), 153–161.CrossRefGoogle Scholar
Jensen, M., and Meckling, W.. “Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305–360.CrossRefGoogle Scholar
Jensen, M., and Murphy, K.. “Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225–264.CrossRefGoogle Scholar
Jin, L. “CEO Compensation, Diversification, and Incentives.” Journal of Financial Economics, 66 (2002), 29–63.CrossRefGoogle Scholar
John, K.; Saunders, A.; and Senbet, L.. “A Theory of Bank Regulation and Management Compensation.” Review of Financial Studies, 13 (2000), 95–125.CrossRefGoogle Scholar
Kashyap, A.; Rajan, R.; and Stein, J.. “Rethinking Capital Regulation.” In Symposium on Maintaining Stability in a Changing Financial System, Federal Reserve Bank of Kansas City (2008).Google Scholar
Kleibergen, F., and Paap, R.. “Generalized Reduced Rank Tests Using the Singular Value Decomposition.” Journal of Econometrics, 133 (2006), 97–126.CrossRefGoogle Scholar
Kovalchik, S.; Camerer, C. F.; Grether, D. M.; Plott, C. R. and Allman, J. M.. “Aging and Decision Making: A Comparison between Neurologically Healthy Elderly and Young Individuals.” Journal of Economic Behavior and Organization, 58 (2005), 79–94.CrossRefGoogle Scholar
Lambert, R. A., and Larcker, D. F.. “An Analysis of the Use of Accounting and Market Measures of Performance in Executive Compensation Contracts.” Journal of Accounting Research, 25 (1987), 85–125.CrossRefGoogle Scholar
Liu, Y.; Mauer, D.; and Zhang, Y.. “Merger Decisions and Inside Debt.” Working Paper, Texas A&M University (2012).CrossRefGoogle Scholar
Manski, C. “Nonparametric Bounds on Treatment Effects.” American Economic Review, 80 (1990), 319–323.Google Scholar
Prendergast, C. “The Tenuous Trade-Off between Risk and Incentives.” Journal of Political Economy, 110 (2002), 1071–1102.CrossRefGoogle Scholar
Rigobon, R., and Stoker, T.. “Bias from Censored Regressors.” Journal of Business and Economic Statistics, 27 (2009), 340–353.CrossRefGoogle Scholar
Shleifer, A., and Vishny, R.. “Liquidation Values and Debt Capacity: A Market Equilibrium Approach.” Journal of Finance, 47 (1992), 1343–1366.CrossRefGoogle Scholar
Sundaram, R. K., and Yermack, D.. “Pay Me Later: Inside Debt and Its Role in Managerial Compensation.” Journal of Finance, 62 (2007), 1551–1588.CrossRefGoogle Scholar
Taylor, R. N. “Age and Experience as Determinants of Managerial Information Processing and Decision Making Performance.” Academy of Management Journal, 18 (1975), 74–81.CrossRefGoogle Scholar
Tobin, J. “Estimation of Relationships for Limited Dependent Variables.” Econometrica, 26 (1958), 24–36.CrossRefGoogle Scholar
Tung, F., and Wang, X.. “Bank CEOs, Inside Debt Compensation, and the Global Financial Crisis.” Working Paper, Boston University (2010).CrossRefGoogle Scholar
Wang, C.; Xie, F.; and Xin, X.. “Managerial Ownership of Debt and Bank Loan Contracting.” Working Paper, Chinese University of Hong Kong (2010).CrossRefGoogle Scholar
Wei, C., and Yermack, D.. “Investor Reactions to CEOs’ Inside Debt Incentives.” Review of Financial Studies, 24 (2011), 3813–3840.CrossRefGoogle Scholar
Yim, S. “The Acquisitiveness of Youth: CEO Age and Acquisition Behavior.” Journal of Financial Economics, 108 (2013), 250–273.CrossRefGoogle Scholar