Bank mergers, equity risk incentives, and CEO stock options

摘要

Purpose - The purpose of this paper is to examine the risk-incentive effect of CEO stock options inrnthe banking industry.rnDesign/methodology/approach - For a sample of industrial mergers, Williams and Rao find thatrnthe risk-incentive effect of CEO stock options is associated with higher post-merger risk. This resultrnindicates that stock options may be effective in mitigating the agency problem of Jensen and Mecklingrnwherein managers take too little risk on behalf of shareholders. The authors extend the method ofrnWilliams and Rao to the banking industry. In particular, they are interested in determining whether thernsame relationship holds for these highly regulated and leveraged firms.rnFindings - Using a sample of 131 bank mergers that took place between 1993 and 2002, the authorsrndetermine that the risk-incentive effect of CEO stock options is positively related to the post-merger levelrnof equity risk. The results of this study also show that the interaction of size and the risk-incentive effectrnis negatively related to volatility following the merger, which agrees with the original study.rnOriginality/value - This paper extends the literature by examining an industry that is largely ignoredrnbecause of its highly regulated nature.