The impact of stockholder's rights (option-based compensation) on risk management in the U.S. banking industry

Abstract

This paper investigates the relationship between option-based executive compensation and risk-taking in the U.S. banking industry over 2007-2012. We obtained a sample of 52 banks and 312 observations to prove the hypothesis we built based on the prior studies in the same field. We considered the effect of governance factors, firm level factors, and compensation structures which are all the control variables in the models to support our study. Through a series of steps in model specifications, the results show that changes of the compensation structures in the U.S. banking industry after the financial crisis are what we would predict from our hypothesis. The positive relationship between option-based compensation and the risk of the banking industry still existed. However, the relationship between them was not as strong as the results of prior studies.