آیا سهام مبتنی بر گزینه غرامت اجرائی منجر به ریسک پذیری می شود؟ تجزیه و تحلیل صنعت بانکداری
|کد مقاله||سال انتشار||تعداد صفحات مقاله انگلیسی||ترجمه فارسی|
|18260||2006||31 صفحه PDF||سفارش دهید|
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Publisher : Elsevier - Science Direct (الزویر - ساینس دایرکت)
Journal : Journal of Banking & Finance, Volume 30, Issue 3, March 2006, Pages 915–945
We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks.
The issue of risk-taking has been a central focus of the banking literature. While banks must operate within the constraints imposed by regulators, they have discretion in making decisions that can have a significant impact on the riskiness of the institution. One area in which banks exercise discretion is in their choice of executive compensation levels and structures. The compensation level and structure employed by each bank has implications for risk-taking and for the agency relation between managers and stockholders. John et al. (1995) note that managerial compensation affects the investment choices made by the firm, and the effects of these choices are magnified when moral hazard and managerial discretion are present. Thus, both regulators and stockholders have an interest in monitoring the executive compensation that is in place in the banking industry. This paper examines the relation between risk-taking and option-based executive compensation in the banking industry. The issue of risk-taking and executive compensation has been previously studied for industrial firms by a number of researchers.1 For example, Agrawal and Mandelker (1987) find that large stock and option holdings by a manager induce him/her to select variance-increasing investments. DeFusco et al. (1990) report that both implied volatility and stock return variance increase after the approval of executive stock option plans. The results for industrial firms, however, cannot necessarily be generalized to the banking industry for several reasons. First, Houston and James (1995) find that the compensation structure in the banking industry differs significantly from the structure in other industries, both in terms of total compensation and in terms of the relative importance of the individual elements that comprise total compensation. Second, evidence presented by Smith and Watts, 1992 and Mayers and Smith, 1992 suggests that compensation is less responsive to firm performance in regulated industries than in unregulated industries. Since banks operate in a different business and regulatory environment than their nonbank counterparts, this may alter the incentives created by the compensation contract. An impressive body of research examining executive compensation and performance has been formed in the banking literature.2 However, few studies on the banking industry examine the relation between executive compensation and firm risk-taking. One such study by Houston and James (1995) reports that bank chief executive officers (CEOs) receive less cash compensation, are less likely to participate in stock option plans, and receive a smaller percentage of their total compensation in the form of stock options than do their counterparts in other industries. They conclude that the compensation structure in the banking industry does not promote risk-taking. However, their inquiry focuses on comparing the compensation structure of banks to the compensation structure of industrial firms rather than analyzing the impact of compensation on risk across banks. More recently, John et al. (2000) make theoretical arguments highlighting the continuing viability and importance of an empirical investigation into the relation between executive compensation and risk. They contend that regulation of bank risk-taking based on imposing capital requirements and restricting asset choices has limited effectiveness. They propose and develop a model that explicitly incorporates bank management’s compensation schedule into the risk-based pricing of deposit insurance. They demonstrate that, unlike capital and asset regulations that indirectly affect managerial decisions, altering the compensation structure provides a direct method of influencing managerial risk-taking incentives. Therefore, the issue of whether the compensation structure in the banking industry affects managerial risk-taking invites further inquiry. Our study differs from previous studies in three important aspects. First, we explicitly examine the impact of option-based compensation on several market-based measures of bank risk: total, systematic, idiosyncratic, and interest rate risks. While a few studies (Saunders et al., 1990 and Chen et al., 1998) have examined the related issue of the relation between managerial stock ownership and bank risk, our analysis provides insight into the relation between various measures of option-based compensation and bank risk-taking.3 Although both managerial stock ownership and option-based compensation are equity ownership, the former represents current ownership and the latter future ownership. While the current ownership may increase or decrease in value, the future ownership (stock options) can experience more dramatic outcomes with exercise values that may reasonably fluctuate from zero to several million dollars due to the leverage effect. This possibly makes stock options a more powerful variable for investigating risk related principal-agent problems in banking. Moreover, purely due to the substantial growth in the use of stock options in the banking sector, the relationship between bank risk-taking and stock options is an important investigation. Second, we analyze a time period over which an expanded investment opportunity set exists in the banking industry because of regulatory changes. In 1990 the Federal Reserve Board first permitted a bank to sell stocks through a subsidiary. Initially the stock market operations were limited to 10% of the company’s total revenue. This ceiling was lifted to 25% in 1996. In 1994, the Riegle-Neal Act permitted bank holding companies (BHCs) to operate in multiple states. Perhaps the ultimate regulatory change that has dramatically changed the opportunity set for banks is the passage of the Gramm-Leach-Bliley Act in 1999, allowing banks to fully expand into the securities and insurance businesses. These changes may have altered the level and structure of executive compensation in the banking industry, highlighting the importance of understanding the relation between compensation and risk-taking (Fields and Fraser, 1999). Indeed, Crawford et al., 1995 and Hubbard and Palia, 1995 find that deregulation has created a more competitive environment, and has resulted in an expansion of managerial discretion and the banking industry’s investment opportunity set. Specifically, Hubbard and Palia (1995) have documented that the value of salary and bonus and the value of options granted increased significantly after deregulation. In a related study, Rajan (1998) finds increasing levels of off-balance sheet activities by BHCs. Third, we analyze a time period (1992–2000) after which the Securities and Exchange Commission in 1992 required that all firms disclose detailed information on executive compensation in the proxy statement due to the prevalent use of incentive-based executive compensation. Using data from this period, our study is able to provide insights that are not available from prior studies. To achieve the objectives of our study, we derive four market-based measures of risk: total, idiosyncratic, systematic, and interest rate risks. These risk measures are then modeled as a function of the accumulation and structure of CEO stock option-based compensation. Our pooled sample contains 68 banks involving 70 CEOs over the time period from 1992 to 2000, resulting in 591 bank-CEO-year observations. Several important conclusions emerge from our analysis. First, in comparison to a sample of industrial firms, the use of stock option-based compensation has become more widespread in the banking industry in recent years, and the percentage of stock option-based compensation relative to total compensation has also increased. Second, the structure of executive compensation (proxied by stock options as a percentage of total compensation) induces risk-taking in the banking industry; risk also impacts compensation structure. Third, the stock of option-based wealth induces risk-taking in the banking industry. This relationship also holds in reverse. We reaffirm these findings using a relative option-based wealth measure. Our finding of a positive relation between option-based compensation and risk highlights the influence of the expanded investment opportunity set that the banking industry has gained through deregulation. Fourth, the results are robust across alternative risk measures and model specifications (both two- and three-equation simultaneous equation systems). Finally, we provide limited evidence that executive option-based wealth enhances shareholder wealth. The remainder of this paper is organized as follows. Section 2 develops hypotheses regarding the impact of compensation on bank risk. Section 3 discusses the methodology and data. Section 4 presents descriptive statistics and empirical results. Section 5 summarizes the major findings of our study.
نتیجه گیری انگلیسی
We investigate the relation between stock option-based bank compensation and risk-taking. We use three different measures of compensation and four different market-based measures of risk to test this relation while employing several alternative estimation methodologies. Our pooled sample contains 68 banks involving 70 CEOs over the time period from 1992 to 2000, resulting in 591 bank-CEO-year observations. Several important conclusions emerge from our analysis. First, in comparison to a sample of industrial firms, the use of stock option-based compensation has become more widespread in the banking industry, and the percentage of stock option-based compensation relative to total compensation has also increased. Second, the structure of executive compensation (proxied by stock options as a percentage of total compensation) induces risk-taking in the banking industry; risk also impacts compensation structure. Third, the stock of option-based wealth induces risk-taking in the banking industry. This relationship also holds in reverse (We reaffirm these findings using a relative option-based wealth measure). Fourth, the results are robust across alternative risk measures and model specifications (both two- and three-equation simultaneous equation systems). Finally, we provide limited evidence that option-based wealth enhances shareholder wealth. These results should be interesting to regulators in their role as monitors of the banking system. Our findings suggest that regulatory oversight of the compensation structure employed in the banking industry is important. Indeed, our results are supportive of the theoretical arguments presented by John et al. (2000) who suggest that regulators need to consider a new paradigm that explicitly provides the appropriate incentives/disincentives for risk-taking within the compensation structure.