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Show allCEO Power, Equity Incentives, and Bank Risk Taking
Abstract
This study examines whether bank risk is a factor influenced by chief executive officer (CEO) power, equity incentives, and the interaction between these factors during 2005 through 2009, which marks the unraveling of the financial crisis. We find that firm specific risk is decreasing with CEO power and CEO equity-based incentives (newly granted stock options and restricted stock and accumulated exercisable and unexercisable stock options). These findings suggest that when CEOs have more power, they can influence the board’s decision-making to their benefit in reducing risk. Further, when their personal wealth is more tied to firm value, they are less likely to take on high risk projects as these projects could be detrimental to their personal wealth. However, we find that CEOs with more power take on higher levels of firm risk when they have greater levels of future personal wealth in the form of unexercisable options. These results suggest that powerful CEOs are more likely to take on risk when their personal wealth is tied to long-term firm value, as opposed to short-term firm value. However, results from a supplementary analysis indicate that just cash compensation (total salary plus bonuses) is linked to higher bank risk which may be responsible in part for the risky, short-term practices that led to the financial crisis.
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