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

Abstract : Theoretical literature (0170 and 0095) 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.
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https://hal-upec-upem.archives-ouvertes.fr/hal-01155502
Contributor : Sabri Boubaker <>
Submitted on : Tuesday, May 26, 2015 - 5:58:11 PM
Last modification on : Wednesday, May 27, 2015 - 1:03:15 AM

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Mohamed Belkhir, Sabri Boubaker. CEO inside debt and hedging decisions: Lessons from the U.S. banking industry. Journal of International Financial Markets, Institutions and Money, Elsevier, 2013, 24 (1), pp.223-246. ⟨http://www.sciencedirect.com/science/article/pii/S1042443112001072⟩. ⟨hal-01155502⟩

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