CEO inside debt holdings and risk-shifting: Evidence from bank payout policies

Srivastav, Abhishek, Armitage, Seth and Hagendorff, Jens ORCID: https://orcid.org/0000-0002-3567-7826 2014. CEO inside debt holdings and risk-shifting: Evidence from bank payout policies. Journal of Banking & Finance 47 , pp. 41-53. 10.1016/j.jbankfin.2014.06.016

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Abstract

Bank payouts divert cash to shareholders, while leaving behind riskier and less liquid assets to repay debt holders in the future. Bank payouts, therefore, constitute a type of risk-shifting that benefits equity holders at the expense of debt holders. In this paper, we provide insights on how CEO incentives stemming from inside debt (primarily defined benefit pensions and deferred compensation) impact bank payout policy in a manner that protects debt holder interests. We show that CEOs with higher inside debt relative to inside equity are associated with more conservative bank payout policies. Specifically, CEOs paid with more inside debt are more likely to cut payouts and to cut payouts by a larger amount. Reductions in payouts occur through a decrease in both dividends and repurchases. Our results also hold over a subsample of TARP banks where we expect the link between risk-shifting and payouts to be of particular relevance because it involves wealth transfers from the taxpayer to equity holders. We conclude that inside debt can help in addressing risk-shifting concerns by aligning the interests of CEOs with those of creditors, regulators, and in the case of TARP banks, the taxpayer.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HF Commerce H Social Sciences > HG Finance
Additional Information:	Available online 26 June 2014
Publisher:	Elsevier
ISSN:	0378-4266
Date of First Compliant Deposit:	30 March 2016
Date of Acceptance:	17 June 2014
Last Modified:	22 Nov 2024 16:45
URI:	https://orca.cardiff.ac.uk/id/eprint/76278

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