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CEO inside debt and hedging decisions: Lessons from the U.S. banking industry

Abstract : Theoretical literature (0170 and 0095) argues that inside debt – pension benefits and deferred compensation – has debt-like payoffs, and can therefore curb executives’ excessive risk-taking incentives created by equity holdings. We test this theory in the banking sector by investigating whether CEOs with larger inside debt holdings compared to their equity-based compensation hedge more their banks’ interest rate risk. Our results show that CEO inside debt holdings have a positive effect on the extent to which a bank uses interest rate derivatives for hedging purposes, implying that debt-like compensation mitigates bank executives’ risk-taking incentives. Our results have important implications for financial regulation attempting to prevent financial crises due, at least partially, to perverse incentives provided to bank executives through compensation.
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Contributor : Sabri Boubaker Connect in order to contact the contributor
Submitted on : Tuesday, May 26, 2015 - 5:58:11 PM
Last modification on : Thursday, September 29, 2022 - 2:21:15 PM


  • HAL Id : hal-01155502, version 1



Mohamed Belkhir, Sabri Boubaker. CEO inside debt and hedging decisions: Lessons from the U.S. banking industry. Journal of International Financial Markets, Institutions and Money, Elsevier, 2013, 24 (1), pp.223-246. ⟨hal-01155502⟩



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