Better safe than sorry? CEO inside debt and risk-taking in bank acquisitions

Abhishek Srivastav, Seth Armitage, Jens Hagendorff*, Tim King

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review


Widespread bank losses during the financial crisis have raised concerns that equity-based compensation for bank CEOs causes excessive risk-taking. Debt-based compensation, so-called inside debt, aligns the interests of CEOs with those of external creditors. We examine whether inside debt induces CEOs to pursue less risky acquisitions. Consistent with this, we show that acquisitions announced by CEOs with high inside debt incentives are associated with a wealth transfer from equity to debt holders. After the completion of a deal, banks where acquiring CEOs have high inside debt incentives display lower market measures of risk and lower loss exposures for taxpayers.
Original languageEnglish
Pages (from-to)208-224
Number of pages17
JournalJournal of Financial Stability
Early online date9 Apr 2018
Publication statusPublished - Jun 2018


  • banks
  • inside debt
  • CEO incentives
  • mergers and acquisitions


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