Executive Compensation and Risk Taking

Bolton, Patrick, Mehran, Hamid and Shapiro, Joel (2015) Executive Compensation and Risk Taking. Review of Finance, 19 (6). pp. 2139-2181.

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This paper studies the connection between risk taking and executive compensation in financial institutions. A theoretical model of shareholders, debtholders, depositors, and an executive suggests that 1) in principle, excessive risk taking (in the form of risk shifting) may be addressed by basing compensation on both stock price and the price of debt (proxied by the credit default swap spread), but 2) shareholders may be unable to commit to designing compensation contracts in this way and indeed may not want to because of distortions introduced by either deposit insurance or naive debtholders. The paper then provides an empirical analysis that suggests that debt-like compensation for executives is believed by the market to reduce risk for financial institutions.

Item Type: Article
Keywords: executive compensation, risk taking, finance
Subject(s): Finance
Date Deposited: 30 Sep 2015 13:13
Last Modified: 22 Feb 2017 15:55
URI: http://eureka.sbs.ox.ac.uk/id/eprint/5511

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