CEO bonus compensation and bank default risk: evidence from the U.S. and Europe

Vallascas, Francesco and Hagendorff, Jens ORCID: https://orcid.org/0000-0002-3567-7826 2013. CEO bonus compensation and bank default risk: evidence from the U.S. and Europe. Financial Markets, Institutions & Instruments 22 (2) , pp. 47-89. 10.1111/fmii.12004

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Abstract

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.

Item Type:	Article
Date Type:	Publication
Status:	Published
Schools:	Business (Including Economics)
Subjects:	H Social Sciences > HJ Public Finance
Uncontrolled Keywords:	banks; bonus compensation; default risk; executive compensation; G21; G33; J33
Publisher:	Wiley-Blackwell
ISSN:	0963-8008
Date of First Compliant Deposit:	30 March 2016
Last Modified:	06 May 2023 06:38
URI:	https://orca.cardiff.ac.uk/id/eprint/76442

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