CEO inside debt and hedging decisions: Lessons from the U.S. banking industry

Mohamed Belkhir, Sabri Boubaker

    Research output: Contribution to journalArticlepeer-review

    15 Citations (Scopus)

    Abstract

    Theoretical literature (Jensen and Meckling, 1976; Edmans and Liu, 2011) argues that inside debt - pension benefits and deferred compensation - has debt-like payoffs, and can therefore curb executives' excessive risk-taking incentives created by equity holdings. We test this theory in the banking sector by investigating whether CEOs with larger inside debt holdings compared to their equity-based compensation hedge more their banks' interest rate risk. Our results show that CEO inside debt holdings have a positive effect on the extent to which a bank uses interest rate derivatives for hedging purposes, implying that debt-like compensation mitigates bank executives' risk-taking incentives. Our results have important implications for financial regulation attempting to prevent financial crises due, at least partially, to perverse incentives provided to bank executives through compensation.

    Original languageEnglish
    Pages (from-to)223-246
    Number of pages24
    JournalJournal of International Financial Markets, Institutions and Money
    Volume24
    Issue number1
    DOIs
    Publication statusPublished - Apr 2013

    Keywords

    • Bank risk
    • Executive compensation
    • Financial regulation
    • Hedging
    • Inside debt

    ASJC Scopus subject areas

    • Finance
    • Economics and Econometrics

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