CEO option compensation and systemic risk in the banking industry

Jeong-Bon Kim; Li Li; Mary L. Z. Ma; Frank M. Song

doi:10.1080/16081625.2016.1155250

Author(s)

Jeong-Bon Kim
Li Li
Mary L. Z. Ma
Frank M. Song

Detail(s)

Original language	English
Pages (from-to)	131-160
Journal / Publication	Asia - Pacific Journal of Accounting & Economics
Volume	23
Issue number	2
Online published	3 Mar 2016
Publication status	Published - 2016
Externally published	Yes

Link(s)

DOI	DOI https://doi.org/10.1080/16081625.2016.1155250 Final Published version
	Check@CityULib
Link to Scopus	https://www.scopus.com/record/display.uri?eid=2-s2.0-84961200315&origin=recordpage
Permanent Link	https://scholars.cityu.edu.hk/en/publications/publication(033e5f56-1203-46e4-88ba-6bed37e372f7).html

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.