Compensation Vega, Deregulation, and Risk‐Taking: Lessons from the US Banking Industry

Abstract

banking , deregulation , executive compensation , stock options , vega , delta , risk-taking ,

CEO Tenure and Risk-Taking

“…This result is in contrast with the positive relation between vega and tenure as documented in Belkhir and Chazi (2010) with a sample of bank holding companies and industrial firms. We note that it is essential to control for the lagged vega to obtain our result.…”

“…If we omit this variable, the relation between vega and CEO tenure becomes positive and significant. Belkhir and Chazi (2010) do not control for the lagged dependent variable.…”

Bankers’ stock options, risk-taking and the financial crisis

“…As in previous studies (e.g., Belkhir and Chazi, 2010;Rajgopal and Shevlin, 2002), a stock option's vega is defined as the sensitivity of a stock option to a change 3 Gorton and Rosen (1995) argue that similar attitude can be held for bank executives who are also shareholders of the bank they manage. Several factors may explain why banks' shareholders will have great incentives to encourage their managers to pursue risky investments.…”

“…Our study differs in several ways from prior studies that examine stock options use and bank risk-taking in the United States (e.g., Belkhir and Chazi, 2010;Chen et al, 2006;Fahlenbrach and Stulz, 2011;Houston and James, 1995). First, we examine a sample of banks incorporated in 29 countries that are authorised to accept deposits in the United Kingdom (UK).…”

“…Chen et al, 2006;Houston and James, 1995) or do not include the crisis years (e.g. Belkhir and Chazi, 2010;Fortin et al, 2010). Therefore, the link between the use of stock options in bankers' pay and the latest financial crisis cannot be directly inferred from their findings.…”