Inside Debt, Bank Default Risk and Performance during the Crisis

Inside Debt and Bank Risk

“…Figure 1 illustrates the central claim of this paper that large inside debt holdings encourage managers to act conservatively, resulting in lower risk and smaller losses during the crisis. Second, this paper contributes to currently existing working papers on inside debt and bank risk (e.g., Tung and Wang (2010), Bennett, Güntay, and Unal (2015)) by its attempts to address empirical issues related to attrition bias, selection bias, and identification problems arising from the endogenous nature of compensation. It also complements previous proposals to shift compensation away from equitybased incentives by tying it directly to the federal deposit insurance premium (John, Saunders, and Senbet (2000)), the value of debt-like instruments (Bebchuk and Spamann (2010)), a bank's credit default swap spread (Bolton et al (2015)), or the pricing of government guarantees (Carpenter, Cooley, and Walter (2011)).…”

CEO Inside Debt and Risk Taking: Evidence From Property–Liability Insurance Firms

“…Recent studies show that banks exhibit lower levels of risk‐seeking behavior in a crisis period if their CEOs hold large inside debt during prefinancial crisis periods (Bennett, Güntay, and Unal, ; Van Bekkum, ). These findings somewhat lend support to the regulatory view that the use of compensation arrangements may influence managerial risk‐taking behavior in financial institutions.…”

Determinants of Financial Distress in U.S. Large Bank Holding Companies

“…Existing studies have investigated the impact of BHC risk characteristics on its default risk, performance, or executive compensation. Bennett et al (2012) find that higher levels of non-performing assets/total asset ratio are negatively associated with the distance-to-default measure. Deng and Elyasiani (2008) use the net charge-off ratio (net charge-offs on loans and leases/total loans) as an indicator of credit risk in their valuation and risk models.…”