Incentive Pay and Systemic Risk

• 成果类型: Article
• 署名作者: Albuquerque, Rui; Cabral, Luis; Guedes, Jose
• 署名单位: Boston College; New York University; Universidade Catolica Portuguesa
• 刊物名称: REVIEW OF FINANCIAL STUDIES
• ISSN/ISSBN: 0893-9454
• DOI: 10.1093/rfs/hhz028
• 发表日期: 2019
• 页码: 4304
• 关键词: relative performance evaluation; DELEGATED PORTFOLIO MANAGEMENT; executive-compensation; moral hazard; IMPACT; FIRMS; externalities

摘要

We show that, in the presence of correlated investment opportunities across firms, risk sharing between firm shareholders and firm managers leads to compensation contracts that include relative performance evaluation. These contracts bias investment choices toward correlated investment opportunities, and thus create systemic risk. Furthermore, we show that leverage amplifies all such effects. In the context of the banking industry, we analyze recent policy recommendations for firm managerial pay and show how shareholders optimally undo the policies' intended effects.