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Journal of Management and Governance

, Volume 22, Issue 4, pp 891–919 | Cite as

Executive compensation in banks: insights from CEO equity incentives and securitization transactions

  • Michele FabriziEmail author
Article
  • 179 Downloads

Abstract

This paper investigates whether CEO equity incentives promote risk-taking activities in the financial industry. Prior research shows that, during the recent credit crisis, banks whose CEOs had high equity incentives performed significantly worse than banks whose CEOs had low equity incentives. A possible explanation for this result is that the incentive to boost stock price induced CEOs to take risks that turned out to be extremely costly. Focusing on securitization transactions that were among the fundamental causes of the financial crisis and using a sample of US financial institutions, the paper provides evidence that banks whose CEOs had high equity incentives engaged in securitization transactions to a greater extent than did financial institutions guided by CEOs with low equity incentives. Moreover, the paper shows that CEOs with high equity incentives securitized riskier loans than did CEOs with low incentives. This study helps to clarify the role of equity-based compensation in promoting risk-taking behaviors in banks.

Keywords

Executive compensation CEO incentives Securitization Financial crisis Banking industry 

Notes

Acknowledgements

I would like to thank Antonio Parbonetti for his guidance on previous versions of this paper. I acknowledge helpful comments and suggestions from Pietro Bonetti, Paul Laux, Gilad Livne, Garen Markarian, Pietro Mazzola, Krishnagopal Menon, Giovanna Michelon, Stephen Penman, Stephen Ryan, Marco Trombetta, and the seminar partecipants at WHU Otto Beisheim School of Management, University of Padova, City University London, 36th European Accounting Association Annual Congress.

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Copyright information

© Springer Science+Business Media, LLC, part of Springer Nature 2018

Authors and Affiliations

  1. 1.Department of Economics and ManagementUniversity of PadovaPaduaItaly

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