Low interest rates and executive risk-taking incentives: Evidence from the united states

• Paula Castro ^[1] ; Maria Teresa Tascon Fernandez ^[1] ; Francisco Javier Castaño Gutiérrez ^[1] ; Borja Amor-Tapia ^[1]
  1. [1] Universidad de León

     Universidad de León

     León, España

     
• Localización: Business Research Quarterly, ISSN 2340-9444, ISSN-e 2340-9436, Vol. 24, Nº. 4, 2021, págs. 324-354
• Idioma: inglés
• DOI: 10.1177/2340944420927716
• Enlaces
  • Texto completo  1    2  
• Resumen

  • This article contributes to the literature by indicating how certain monetary policies impact the compensation incentives of US managers to adopt riskier business policies. Specifically, based on the agency problems between shareholders and managers and between shareholders and creditors, a research framework is developed to identify the influence of low interest rates on managers’ risk-taking incentives proxied by the sensitivity of executive compensation to stock return volatility (Vega). We examine 1,293 firms in the United States between 2000 and 2016, and the results indicate that low interest rates increase the managers’ short-term risk-taking incentives and that those incentives contribute to the risk effectively taken by the firm. Our results are robust to the use of alternative monetary proxies and to the presence of passive versus active institutional shareholders.

• Referencias bibliográficas
  • Almazan, A., Hartzell, J. C., & Starks, L. T. (2005). Active institutional shareholders and cost of monitoring: Evidence from executive...
  • Andreou, P. C., Karasamani, I., Louca, C., & Ehrlich, D. (2017). The impact of managerial ability on crisis-period corporate investment....
  • Aramonte, S., Lee, S. J., & Stebunovs, V. (2019). Risk taking and low longer-term interest rates: Evidence from the U.S. syndicated term...
  • Arellano, M. (2003). Panel data econometrics. Oxford University Press.
  • Arellano, M., & Bover, O. (1995). Another look at the instrumental variable estimation of error-components models. Journal of Econometrics,...
  • Baker, S. R., Nicholas, B., & Steven, J. D. (2016). Measuring economic policy uncertainty. Quarterly Journal of Economics, 131(4), 1593–1636....
  • Bakke, T. E., Mahmudi, H., Fernando, C. S., & Salas, J. M. (2016). The causal effect of option pay on corporate risk management. Journal...
  • Balsam, S., Gu, Y., & Mao, C. X. (2018). Creditor influence and CEO compensation: Evidence from debt covenant violations. The Accounting...
  • Baltagi, B. H. (2005). Econometric analysis of panel data. John Wiley.
  • Barnea, A., Haugen, R. A., & Senbet, L. W. (1980). A rationale for debt maturity structure and call provisions in the agency theoretic...
  • Bebchuk, L. A., & Fried, J. M. (2010). Paying for long-term performance. University of Pennsylvania Law Review, 158(658), 1915–1960.
  • Berger, A. N., & Bouwman, C. H. S. (2013). How does capital affect bank performance during financial crises? Journal of Financial Economics,...
  • Bernanke, B. S., & Gertler, M. (1995). Inside the black box: The credit channel of monetary policy transmission. Journal of Economic Perspectives,...
  • Billett, M., King, T. H. D., & Mauer, D. C. (2007). Growth opportunities and the choice of leverage, debt maturity, and covenants. The...
  • Black, F., & Scholes, M. S. (1973). The pricing of options and corporate liabilities. Journal of Political Economy, 81(3), 637–654. https://doi.org/10.1086/260062
  • Blundell, R., & Bond, S. (1998). Initial conditions and moment restrictions in dynamic panel data models. Journal of Econometrics, 87(1),...
  • Boivin, J., Kiley, M. T., & Mishkin, F. S. (2010, April). How has the monetary transmission mechanism evolved over time? (NBER WP No....
  • Bolton, P., Scheinkman, J., & Xiong, W. (2006). Executive compensation and short-termist behaviour in speculative markets. The Review...
  • Borio, C., & Zhu, H. (2012). Capital regulation, risk-taking and monetary policy: A missing link in the transmission mechanism? Journal...
  • Brissimis, S. N., & Delis, M. D. (2009). Identification of a loan supply function: A cross-country test for the existence of a bank lending...
  • Brockman, P., Martin, X., & Unlu, E. (2010). Executive compensation and the maturity structure of corporate debt. The Journal of Finance,...
  • Cadman, B., & Sunder, J. (2014). Investor horizon and CEO horizon incentives. Accounting Review, 89(4), 1299–1328. https://doi.org/10.2308/accr-50719
  • Cain, M. D., & McKeon, S. B. (2016). CEO personal risk-taking and corporate policies. Journal of Financial and Quantitative Analysis,...
  • Cantero-Sáiz, M., Sanfilippo-Azofra, S., Torre-Olmo, B., & López-Gutiérrez, C. (2017). Trade credit, sovereign risk and monetary policy...
  • Cantero-Sáiz, M., Sanfilippo-Azofra, S., Torre-Olmo, B., & López-Gutiérrez, C. (2018). A new approach to the analysis of monetary policy...
  • Chan, C. C., Lin, B. H., Chang, Y. H., & Liao, W. C. (2013). Does bank relationship matter for corporate risk-taking? Evidence from listed...
  • Cohen, R. B., Brian, J. H., & Viceira, L. M. (2000). Do executive stock options encourage risk-taking? [Working Paper]. Harvard Business...
  • Coles, J. L., Naveen, D. D., & Naveen, L. (2006). Managerial incentives and risk taking. Journal of Financial Economics, 79(2), 431–468....
  • Core, J. E., & Guay, W. R. (2002). Estimating the value of employee stock option portfolios and their sensitivities to price and volatility....
  • Creal, D. D., & Wu, C. (2014). Term structure of interest rate volatility and macroeconomic uncertainty [Working Paper]. Mimeo, Chicago...
  • Demsetz, H., & Lehn, K. (1985). The structure of corporate ownership: Causes and consequences. Journal of Political Economy, 93(6), 1155–1177....
  • Den Haan, W. J., Sumner, S., & Yamashiro, G. (2007). Bank loan portfolios and the monetary transmission mechanism. Journal of Monetary...
  • Dong, Z., Wang, C., & Xie, F. (2010). Do executive stock options induce excessive risk taking? Journal of Banking & Finance, 34(10),...
  • Edmans, A., Fang, V., & Lewellen, K. (2015). Equity vesting and managerial myopia (NBER Working Paper No. 19407). https://doi.org/10.3386/w19407
  • Edmans, A., Gabaix, X., Sadzik, T., & Sannikov, Y. (2012). Dynamic CEO compensation. The Journal of Finance, 67(5), 1603– 1647. https://doi.org/10.1111/j.1540-6261.2012.01768.x
  • Elyasiani, E., & Jia, J. (2010). Distribution of institutional ownership and corporate firm performance. Journal of Banking & Finance,...
  • Ferris, S. P., Javakhadze, D., & Rajkovic, T. (2017). CEO social capital, risk-taking and corporate policies. Journal of Corporate Finance,...
  • Fich, E. M., Starks, L. T., & Yore, S. A. (2014). CEO dealmaking activities and compensation. Journal of Financial Economics, 114(3),...
  • Gambacorta, L., & Marques-Ibane, D. (2011). The bank lending channel: Lessons from the crisis. Economic Policy, 26(66), 135–182. https://doi.org/10.1111/j.1468- 0327.2011.00261.x
  • Gopalan, R., Milbourn, T., Song, F., & Thakor, A. (2014). Duration of executive compensation. The Journal of Finance, 69(6), 2777–2817....
  • Gormley, T., Matsa, D., & Milbourn, T. (2013). CEO compensation and corporate risk: Evidence from a natural experiment. Journal of Accounting...
  • Grinstein, Y., & Michaely, R. (2005). Institutional holdings and payout policy. The Journal of Finance, 60(3), 1389–1426. https://doi.org/10.1111/j.1540-6261.2005.00765.x
  • Guay, W. (1999). The sensitivity of CEO wealth to equity risk: An analysis of the magnitude and determinants. Journal of Financial Economics,...
  • Hartzell, J. C., & Starks, L. T. (2003). Institutional investors and executive compensation. The Journal of Finance, 58(6), 2351– 2374....
  • Hayes, R. M., Lemmon, M., & Qiu, M. (2012). Stock options and managerial incentives for risk taking: Evidence from FAS 123R. Journal of...
  • Himmelberg, C. P., Hubbard, R. G., & Palia, D. (1999). Understanding the determinants of managerial ownership and the link between ownership...
  • Hong, J. (2019). Managerial compensation incentives and corporate debt maturity: Evidence from FAS 123R. The Journal of Corporate Finance,...
  • Jensen, M. C., & Murphy, K. J. (1990). CEO incentives: It’s not how much you pay, but how. Harvard Business Review, 68(3), 138–153. https://doi.org/10.1111/j.1745- 6622.2010.00262.x
  • Jiménez, G., Ongena, S., Peydró, J. L., & Saurina, J. (2014). Hazardous times for monetary policy: What do twentythree million bank loans...
  • Karpavicius, S., & Yu, F. (2019). Managerial risk incentives and a firm’s financing policy. Journal of Banking & Finance, 100, 167–181....
  • Kim, J. B., Li, Y., & Zhang, L. (2011). CFOs versus CEOs: Equity incentives and crashes. Journal of Financial Economics, 101(3), 713–730....
  • Kim, K., Patro, S., & Pereira, R. (2017). Option incentives, leverage, and risk-taking. Journal of Corporate Finance, 43, 1–18. https://doi.org/10.1016/j.jcorpfin.2016.12.003
  • Kishan, R. P., & Opiela, T. P. (2000). Bank size, bank capital and the bank lending channel. Journal of Money, Credit and Banking, 32(1),...
  • Knopf, J. D., Nam, J., & Thornton, J. H. (2002). The volatility and price sensitivities of managerial stock option portfolios and corporate...
  • Leland, H. E., & Toft, K. B. (1996). Optimal capital structure, endogenous bankruptcy, and the term structure of credit spreads. The Journal...
  • Lian, C., Ma, Y., & Wang, C. (2019). Low interest rates and risktaking: Evidence from individual investment decisions. The Review of Financial...
  • Lin, Y. R., & Fu, X. M. (2017). Does institutional ownership influence firm performance? Evidence from China. International Review of...
  • Liu, Y., & Mauer, D. (2011). Corporate cash holdings and CEO compensation incentives. Journal of Financial Economics, 102(1), 183–198....
  • Maddaloni, A., & Peydró, J. L. (2011). Bank risk-taking, securitization, supervision, and low interest rates: Evidence from the Euro-area...
  • Mao, C. X., & Zhang, C. (2018). Managerial risk-taking incentive and firm innovation: Evidence from FAS 123R. Journal of Financial and...
  • Merton, R. C. (1973). Theory of rational option pricing. The Bell Journal of Economics and Management Science, 4(1), 141– 183. https://doi.org/10.2307/3003143
  • Munjal, S., Requejo, I., & Kundu, S. K. (2018). Offshore outsourcing and firm performance: Moderating effects of size, growth and slack...
  • Paligorova, T., & Santos, J. A. C. (2017). Monetary policy and bank risk-taking: Evidence from the corporate loan market. Journal of Financial...
  • Rajan, R. G., & Zingales, L. (1995). What do we know about capital structure? Some evidence from international data. The Journal of Finance,...
  • Saunders, A., & Song, K. (2018). Bank monitoring and CEO risk-taking incentives. Journal of Banking & Finance, 88, 225–240. https://doi.org/10.1016/j.jbankfin.2017.12.003
  • Serfling, M. A. (2014). CEO age and the riskiness of corporate policies. Journal of Corporate Finance, 25, 251–273. https://doi.org/10.1016/j.jcorpfin.2013.12.013
  • Shen, C. H., & Zhang, H. (2013). CEO risk incentives and firm performance following R&D increases. Journal of Banking & Finance,...
  • Thakor, A. V. (1990). Investment “myopia” and the internal organization of capital allocation decisions. The Journal of Law, Economics, and...
  • Webb, R., Beck, M., & McKinnon, R. (2003). Problems and limitations of institutional investor participation in corporate governance. Corporate...