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CEO Bonus Compensation and Bank Default Risk: Evidence from the U.S. and Europe
Author(s) -
Vallascas Francesco,
Hagendorff Jens
Publication year - 2013
Publication title -
financial markets, institutions and instruments
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.386
H-Index - 23
eISSN - 1468-0416
pISSN - 0963-8008
DOI - 10.1111/fmii.12004
Subject(s) - incentive , cash , executive compensation , business , compensation (psychology) , default risk , monetary economics , sample (material) , financial system , financial stability , economics , finance , credit risk , microeconomics , psychology , chemistry , chromatography , psychoanalysis
We investigate the link between the incentive mechanisms embedded in CEO cash bonuses and the riskiness of banks. For a sample of U.S. and European banks, we employ the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk‐reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.