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Patricia Boyallian, Pablo Ruiz-Verdú, Leverage, CEO Risk-Taking Incentives, and Bank Failure during the 2007–10 Financial Crisis, Review of Finance, Volume 22, Issue 5, August 2018, Pages 1763–1805, https://doi.org/10.1093/rof/rfx051
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Abstract
Usual measures of the risk-taking incentives of bank CEOs do not capture the risk-shifting incentives that the exposure of a CEO’s wealth to his firm’s stock price (delta) creates in highly levered firms. We find evidence consistent with the importance of these incentives for bank CEOs: In a sample of large US financial firms, a higher pre-crisis delta is associated with a significantly higher probability of failure during the 2007–10 financial crisis in highly levered firms, but not in less levered firms.
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