CEO option compensation and systemic risk in the banking industry

Research output: Journal Publications and Reviews (RGC: 21, 22, 62)21_Publication in refereed journalpeer-review

2 Scopus Citations
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Author(s)

Detail(s)

Original languageEnglish
Pages (from-to)131-160
Journal / PublicationAsia - Pacific Journal of Accounting & Economics
Volume23
Issue number2
Online published3 Mar 2016
Publication statusPublished - 2016
Externally publishedYes

Abstract

We document that CEO risk-taking incentives induced by stock option compensation increase a bank’s contribution to systemic distress risk and systemic crash risk through reacting to common risk exposure of the banking industry. We also find that this relation operates through channels of engagement in non-interest income-generating activities and maturity mismatch associated with short-term debt financing. Further analysis reveals that CEO option-based risk-taking incentives increase investments in innovative financial products that form naturally interconnected networks, which increase systemic risk. Finally, we show that market illiquidity and financial crisis accentuate the relation between CEO risk-taking incentives and systemic risk.

Research Area(s)

  • banking, CEO risk-taking incentives, Stock option compensation, systemic risk