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Inside Debt and Bank Risk

Published online by Cambridge University Press:  10 June 2016

Sjoerd van Bekkum
Sjoerd van Bekkum*
Affiliation:
vanbekkum@ese.eur.nl, Erasmus University, Erasmus School of Economics, Rotterdam, 3000 DR, Netherlands.
*
*Corresponding author: vanbekkum@ese.eur.nl
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Abstract

Inside debt compensation held by top officers of U.S. banks is negatively related to risk and risk taking. The evidence reveals a robust and strongly negative relation between end-of-2006 inside debt and 2007–2009 bank-specific risk exposures in terms of lost stock market value, volatility, tail risk, and the probability of financial distress. Banks with managers having large inside debt holdings are also characterized by better-quality assets, more conservative balance sheet management, and a stronger tendency toward traditional banking activities. The results suggest that debt-based compensation limits bank risk and risk taking by encouraging more conservative decision making.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 51 , Issue 2 , April 2016 , pp. 359 - 385
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2016 

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