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Size, Risk, and Governance in European Banking$
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Jens Hagendorff, Kevin Keasey, and Francesco Vallascas

Print publication date: 2013

Print ISBN-13: 9780199694891

Published to Oxford Scholarship Online: January 2014

DOI: 10.1093/acprof:oso/9780199694891.001.0001

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Executive Pay and Risk-taking in the European Banking Industry

Executive Pay and Risk-taking in the European Banking Industry

(p.159) 7 Executive Pay and Risk-taking in the European Banking Industry
Size, Risk, and Governance in European Banking

Jens Hagendorff

Oxford University Press

This chapter analyzes a unique and hand collected dataset of executive compensation by all European bank CEOs of listed banks that publish such data. To further expand the sample of banks, this chapter also includes a sample of similarly sized U.S. banks. The analysis employs the Merton distance to default model to show that increases in CEO cash bonuses lower the default risk of a bank. However, we find no evidence of cash bonuses exerting a risk-reducing effect when banks are financially distressed or when banks operate under weak bank regulatory regimes. Our results link bonus compensation in banking to financial stability and caution that attempts to regulate bonus pay need to tailor CEO incentives to the riskiness of banks and to regulatory regimes.

Keywords:   Cash Bonuses, Default Risk, Regulation

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