Title: CEO risk incentives and the riskiness of securitisation transactions in the financial industry

Authors: Michele Fabrizi; Antonio Parbonetti

Addresses: Department of Economics and Management, University of Padova, Via del Santo, 33, 35123 Padova, Italy ' Department of Economics and Management, University of Padova, Via del Santo, 33, 35123 Padova, Italy

Abstract: The paper investigates the role of CEO risk incentives in increasing the volume and the riskiness of securitisation transactions in the financial industry. Using a sample of US financial institutions, and a system model to account for the endogeneity problem between risk incentives and securitisation, we document that: 1) financial institutions whose CEOs had high risk incentives engaged in securitisation transactions to a larger extent than did financial institutions guided by CEOs with low risk incentives; 2) CEOs with high risk-related incentives securitised riskier loans than did CEOs with low incentives. Thus, our results suggest that CEO risk incentives induced banks to focus on securitisations and increased the riskiness of such transactions.

Keywords: executive compensation; CEO incentives; securitisation transactions; financial crisis; banking industry; risk incentives; equity incentives; corporate governance; loan risks.

DOI: 10.1504/IJBAAF.2015.077032

International Journal of Banking, Accounting and Finance, 2015 Vol.6 No.2, pp.122 - 150

Received: 02 Jul 2015
Accepted: 05 May 2016
Published online: 17 Jun 2016 *

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