Advances in Economics and Business Vol. 4(7), pp. 366 - 373
DOI: 10.13189/aeb.2016.040706
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Pay-risk Sensitivity and Bank Performance


Pei-I Chou 1,*, Chia-Hao Lee 2
1 Department of Business, National Open University, Taiwan
2 Department of Finance, National Taichung University of Science and Technology, Taiwan

ABSTRACT

This study investigates the mediation effect of the pay-risk sensitivity of CEOs on the relation between risky investment and bank performance over the sample period of 2000 to 2007. The empirical results of the study show that CEOs of BHCs engage in more private MBSs will increase their pay-risk sensitivity incentives, and then induces the relation between risky investment and bank performance to become negative. These results imply that the pay-risk sensitivity incentives indirectly induce manager to increase his own benefits at the expense of shareholders. Furthermore, we classify CEOs of BHCs as three levels of overconfidence, and find that the pay-risk sensitivity incentive has a mediation effect on the relation between private MBSs and firm performance in excessively overconfident CEOs group, implying that the levels of CEOs confidence should be considered while compensation committee designs a flawless contract for encouraging managers put shareholders' best interests in front of theirs.

KEYWORDS
Pay-risk Sensitivity, Private Mortgage-backed Security, Bank Holding Companies, CEOs Overconfidence, Performance

Cite this paper
Pei-I Chou , Chia-Hao Lee . "Pay-risk Sensitivity and Bank Performance." Advances in Economics and Business 4.7 (2016) 366 - 373. doi: 10.13189/aeb.2016.040706.