Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
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Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
Executive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivof executive compensation to analyze tire link between incentive compensation and r isk taking. Our model takes into accoruit the loss 111 the value of an executive's expected wealth from employment if the firm becomes insolvent dining a bad state of the economy. We illustrate that a given compensat Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivion package may lead to different levels of asset risk trader different economic states. Most importantly, we show that the positive relationship betwExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
een equity-based compensation and risk taking may weaken and possibly disappear during systemic financial crises. An important policy implication fromExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv G21. G28. G38. E58.Keywords: executive compensation: risk taking: regulation: equity based compensation: economic crisis♦ Corresponding author: Alon Raviv, Brandcis University. International Business School. Mailstop 32. Walthall). MA 02454-9110. Tel: +1 (78D-736-2249 E-mail: aravivrtfbrandeis.edu: Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv♦* Elif Sisli Ciamarra. Brandeis University, International Business School. Mailstop 32. Waltham. MA 02454-9110. Tel: -1 (781>736-8544. E-mail: esisliExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
gbrandeis.edu.We would like to acknowledge Inglof Dittmann. Michael Gofman. Jens Hilscher. Antoni Vaello-Sebastia. David Yermack. Dan Zhang and seminaExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_RavivroductionFollowing (he financial crisis that erupted in 2007. large banking organizations have been asked to reconsider then executive compensation practices based on the view that incentive compensation practices in the financial industry were one of the many factors contributing to the financial c Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivrisis. In Jiuie 2010. U.S. regulator}- agencies1 jointly issued the Final Guidance on Banking Incentive Compensation, designed to ensure that incentivExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
e compensation policies do not encourage imprudent risk taking 111 financial institutions. However, there IS mixed evidence regarding whether incentivExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivequity based compensation and managerial risk taking in the financial sector by presenting a model in which the relationship depends on the state of the economy. We develop a model to estimate asset risk that an executive would optimally target given her compensation structure, film's capital struct Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivure (leverage) and the state of the economy. Oru mam contribution to the existing literature is to integrate the state of the economy in the analysisExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
of executive compensation and risk taking, and to illustrate that a given compensation package may lead to different levels of asset risk under differExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv firm she is managing becomes insolvent, as a pan1The guidelines were issued by the following regulators The Federal Reserve, the Office of the Comptroller of the Currency (OCC), the Office of Thrift Supervision (OTS) and the Federal Deposit Insurance Corporation (FDIC).2The following papers provide Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivd supporting evidence for a positive link between equity-based compensation and asset risk: Coles. Daniel, and Navccn (2006). Core and Guay (2002). ChExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
en, Steiner and Whyte (2006): Low (2009). .Xieluan and Rosenberg (2008). and Rajgopal and Shevlin (2002). On the other hand. Carpenter (2000) and RossExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviviw due Io firm-specific financial distress, which is (he expected loss hl executive wealth from employment if rhe financial firm becomes insolvent during her tenure. This component may include an executive’s uninsured pension benefits that would be foregone (Edmans and T ill. 2011; Gerakos. 2007; Su Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivndaram and Yermack, 2007; Bolton. Mehran and Shapiro. 2010). reputation costs (Fama. 1980; llnslilcilcr and lhakor. 1992), and loss of future employmeExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
nt opportunities (Gilson, 1989).2.Loss due Io systemic crisis, which IS incurred only when the financial institution becomes insolvent at a time of syExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivfinancial institution becomes insolvent dining a systemic crisis. The additional loss occurs because an executive's career concern since her alternative employment opportunities would be more limited during a systemic crisis. This theoretical assumption is supported by empirical work that shows bein Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivg displaced in recessions may lead to higher income losses compared to being displaced during nou-reccssion periods. which we review in Section 2.hl oExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
ur analysis we let the asset risk of a financial institution Ik* determined by an executive whose main objective is to maximize rhe value of her own cExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv die regulator targets a desired level of asset risk and determines the compensation structure that would incentivize the executive to rake that risk level. Tn cases where regulating executive pay is not sufficient. the regulator sets a maximum limit on die asset3risk through alternative regulation Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivsuch as capital adequacy ratios. Given this framework, we then analyze the risk taking under different states of the economy.We illustrate that the reExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
lationship between equity-based compensation and risk taking depends on the state of the economy, hl particular, we are able to show that a manager’s Executive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv’ On the other hand, when the economy is healthy and far from the systemic crisis tlueshold. the same manager with exactly the same level of equitybased compensation and facing the same leverage ratio would optimally target a higher risk level Our conclusion is in line with DeYoung. Peng and Yan (20 Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv12). who provide evidence for a significant positive correlation between economic conditions and risk taking in the banking industry*. I.e. banks faciExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
ng stronger (weaker) economic conditions choose more (less) risky business policies, and also with Albertazzi and Gambacoita (2009). who show that banExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv loans when the economy is booming, and use this finding as an evidence for a potential failure of capital regulation to contain risk during very good times. Jokipii and Milne (2011) also give evidence for cyclicality between capital and risk adjustments in the banking sector.Since we use an option Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivbased approach and the no-arbitrage pricing methodology of the compensation is free of risk preference, the lower- risk taking incentive during economExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
ic3Kempf. Rucnzi. and Thiele (2009) show that mutual fund managers decrease risk during years marked by negative stock market returns when "employmentExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravive risk taking motivation of an executive by quantifying the value of its compensation undei different state of the economy and compensation structures.4downturns solely steins fiom the new compensation component in otu model- loss due to systemic crisis.We also present four extensions of the model F Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivirst, we include an extra component of executive compensation which creates loss to the executive in the event of default during boom time Second, weExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
introduce bankruptcy costs to our pricing model, which create difference between the value of the levered and the unlevered financial institution. ThiExecutive Compensation, Risk TakingAndThe State of The EconomyAlon Raviv and Elif Sisli-CiamarraAugust, 2012AbstractIn this paper we present a model o Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivlation levels between the returns of the economic index and the financial institution's assets. While each contribution has a varying effect on the risk motivation of the executive in our model, our main conclusion in the paper r emains unchanged in the extended model- same level of equity-based com Executive_Compensation_and_Economy___Revision_Aug_21__Alon_Ravivpensation induces lower risk taking when the economy is in a systemic crisis.The paper findings contribute to the ongoing debate on the structure of nExecutive_Compensation_and_Economy___Revision_Aug_21__Alon_Raviv
eeded reforms regarding executive compensation. In a recent study, comparing the banking films with nonregulated films. Minnick. Unal and Yang (2012)Gọi ngay
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