Bankers’ stock options, risk-taking and the financial crisis

Minhat, Marizah; Abdullah, Mazni

Abstract

This study investigates the relationship between the use of stock options and bank risk in the context of the 2007-2008 financial crisis for banks that are authorised to accept deposits in the United Kingdom. These banks are affected by the European regulation on variable pay, but, to our knowledge, their usage of stock options has not been examined in previous studies. Paying bankers with stock options can generate two types of managerial incentives, namely, incentives to improve performance and incentives to take risk. Controlling for incentives to improve performance, we find that banks’ total risk and insolvency risk increase with the risk-taking incentives induced by stock options. We also find that this relationship is more pronounced surrounding the crisis period. The findings of this study can serve as institutionally relevant empirical support for the European regulation on variable pay.

Citation

Minhat, M., & Abdullah, M. (2016). Bankers’ stock options, risk-taking and the financial crisis. Journal of Financial Stability, 22, 121-128. https://doi.org/10.1016/j.jfs.2016.01.008

• Journal Article Type: Article
• Acceptance Date: Jan 13, 2016
• Online Publication Date: Jan 22, 2016
• Publication Date: 2016-02
• Deposit Date: Jan 19, 2016
• Publicly Available Date: Jul 23, 2017
• Journal: Journal of Financial Stability
• Print ISSN: 1572-3089
• Publisher: Elsevier
• Peer Reviewed: Peer Reviewed
• Volume: 22
• Pages: 121-128
• DOI: https://doi.org/10.1016/j.jfs.2016.01.008
• Keywords: Executive Pay; Stock Options; Vega; Bank Risk-taking; Financial Crisis
• Public URL: http://researchrepository.napier.ac.uk/id/eprint/9451
• Contract Date: Jan 19, 2016