Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis*

Abstract

Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO's wealth to his firm's stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large U.S. financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007-2010 financial crisis in highly levered firms, but not in less levered firms.

Differential Risk‐taking Implications of Performance Incentives From Stock and Stock Option Holdings

“…Similar to our analysis, Boyallian and Ruiz‐Verdú () find a negative association between delta and risk taking, but their analysis focuses on the U.S. banking sector before 2010.…”

“…We also contribute to the literature by providing an explanation for the varying delta coefficient signs reported in empirical studies. Whereas some studies document a negative relation between delta and firm risk (Boyallian and Ruiz‐Verdú ), other studies find a positive relation (Cohen, Dey, and Lys ; Coles, Daniel, and Naveen ; Armstrong and Vashishtha ; Savaser and Şişli‐Ciamarra ) or an insignificant relation (Low ; Hayes, Lemmon, and Qiu ; Gormley, Matsa, and Milbourn ). Our proposed measure of relative pay‐for‐performance incentives (i.e., source ratio) highlights the risk‐taking implications of the compositional shifts that can occur in delta (e.g., due to regulatory changes) and provides an empirically more robust and consistent interpretation of the delta–firm risk relation.…”

Government Guarantees and the Valuation of American Banks

“…There is also a literature that examines the impact of equity-based incentives for CEOs on bank risk taking. See for example Chesney, Stromberg, and Wagner (2012), Larcker, Ormazabal, Tayan, and Taylor (2014), and Boyallian and Ruiz-Verdú (2017).…”

Price interactions in the credit market and banks instability over the crisis and non-crisis periods in the Russian economy

“…Среди балансовых наиболее простыми, а потому популярными, являются такие показатели, как доля проблемных и безнадежных ссуд в кредитном портфеле (NPL, Non-Performing Loans) 2 и Z -индекс устойчивости банков, показывающий, на сколько стандартных отклонений должна сократиться прибыльность банков, чтобы образовавшийся убыток превзошел размеры собственного капитала (Berger et al, 2009;Beck et al, 2013;Anginer et al, 2014). К типичным эконометрическим показателям относят меры вероятности банкротства, рассчитываемые в рамках логит-или пробит-регрессий (DeYoung, Torna, 2013;Audrino et al, 2019), линейных моделей вероятности (Boyallian, Ruiz-Verdu, 2018) или в рамках анализа выживаемости (Brown, Dinc, 2011).…”