In our paper, CEO Job Security and Risk-Taking, which was recently made publicly available on SSRN, we use the length of employment contracts to estimate CEO turnover probability and its effects on risk-taking. Protection against dismissal should encourage CEOs to pursue riskier projects. Indeed, we show that firms with lower CEO turnover probability exhibit higher return volatility, especially idiosyncratic risk. An increase in turnover probability of one standard deviation is associated with a volatility decline of 17 basis points. This reduction in risk is driven largely by a decrease in investment and is not associated with changes in compensation incentives or leverage.
Posts Tagged ‘Peter Cziraki’
In the paper, Trading by Bank Insiders Before and During the Financial Crisis, which was recently made publicly available on SSRN, I investigate whether managers of large U.S. banks foresaw the underperformance of their own bank prior to the recent financial crisis. To shed light on this question, I analyze the trades of bank managers in their own bank’s stock. Using banks’ performance during the crisis as an ex-post measure of risk exposure, the paper examines whether the bankers that took the most risk changed their insider trading before the onset of the crisis. The paper also links trading by bank insiders to the developments in the housing market, which played a crucial role in starting the crisis.
The role of bank managers in the crisis has been subject to considerable debate both in the academic literature and in the popular press. On the one hand, Fahlenbrach and Stulz (2011) do not find strong evidence to support the notion that incentive packages contributed to the crisis. Their results indicate that CEOs were holding sizeable equity stakes even as the crisis hit, and did not reduce their ownership in 2007 or during the peak of the crisis in 2008. They conclude that CEOs believed that the risks they took before the crisis would pay off, but that this turned out not to be the case. On the other hand, Bebchuk et al. (2010) criticize the incentive structures of bank managers. They point out that the top managers of Bear Stearns and Lehman Brothers cashed out a substantial amount of options in the period prior to the crisis. Bhagat and Bolton (2011) also dispute that managers had no awareness of the large risks they were facing. They analyze the compensation structure and CEO payoffs of the 14 largest US banks and argue that managerial incentives led to excessive risk-taking. This view is supported also by Cheng et al. (2009), who find a positive relation between excess executive compensation and risk taking. Their evidence suggests that overpaying bank managers who take high risks is positively associated with the level of institutional ownership of the bank.