Bankers’ stock options, risk-taking and the financial crisis

This study investigates the relationship between the use of stock options and bank risk in the context of the 2007-2008 financial crisis for banks that are authorised to accept deposits in the United Kingdom. These banks are affected by the European regulation on variable pay, but, to our knowledge, their usage of stock options has not been examined in previous studies. Paying bankers with stock options can generate two types of managerial incentives, namely, incentives to improve performance and incentives to take risk. Controlling for incentives to improve performance, we find that banks’ total risk and insolvency risk increase with the risk-taking incentives induced by stock options. We also find that this relationship is more pronounced surrounding the crisis period. The findings of this study can serve as institutionally relevant empirical support for the European regulation on variable pay

Is executive compensation a substitute governance mechanism to debt financing and leasing?

This study examines whether and how CEO equity incentives relate to financing choices (i.e., debt and leases). Using manually collected CEO compensation and lease data for a sample of large UK firms, we found evidence of a negative relationship between CEO equity incentives and firm leverage. We also found that CEO equity incentives and leases are negatively related. The results are consistent with the theory introduced in this study on the substitutability of executive compensation and firm’s debt/lease financing. Our findings represent fresh empirical evidence and renewed interpretation regarding the relationship between executive equity-based incentives and firm’s financing choices. The substitutability theory we introduced here suggests that firms with greater use of debt and/or leases will implement less equity-based compensation in mitigating the agency cost of equity

Regulatory Arbitrage in Relation to International Human Rights

The adoption of the United Nations (UN) Charter in 1945 marked the legalization of international human rights. Despite the legalized status of human rights, their violation by states is not uncommon. This article questions why a state might violate international human rights. Analyzing this issue from an economic perspective, this article advances regulatory arbitrage theory to rationalize a state’s violation of human rights. It discusses regulatory arbitrage-type behaviours among state actors that derogate from the obligations to respect, protect and fulfil human rights. Defending state sovereignty, minimizing regulatory or compliance costs, and prioritizing economic achievement are identified as rational arbitrage actions that circumvent international human rights. We call for competent and credible governance mechanisms that can increase the cost of arbitrage to disincentivize state violation of international human rights

Stock Options and Credit Default Swaps in Risk Management

The use of stock options and credit default swaps (CDS) in banks is not uncommon. Stock options can induce risk-taking incentives, while CDS can be used to hedge against credit risk. Building on the existing literature on executive compensation and risk management, our study contributes novel empirical support for the role of stock options in restraining the use of CDS for hedging purposes. Based on data of CEO stock options and CDS held by 60 European banks during the period 2006-2011, we find a negative relationship between option-induced risk-taking incentives (vega) and the proportion of CDS held for hedging. However, the extent of CDS held for hedging is found to be positively related to default risk in the period leading to the financial crisis that erupted in 2007. The findings imply that restraining the use of stock options can incentivize hedging with CDS, but this risk management strategy will not necessarily produce lower default risk in times of systemic credit crisis

The Theory of Uncertainty

In the business world, accountants are perceived as individuals with high levels of competency in decision-making involving economic criterion of costs versus benefits, measured in terms of monetary units. They are involved in the valuation of assets and liabilities which are tangible and intangible in nature. Accountants are essentially responsible to form reliable mathematical expectations concerning the future economic benefits and costs. However, in a practical sense, the future is uncertain at best. 'Uncertainty’ thus poses a big challenge to the practicality of the pseudo-mathematical approach to decision-making that dominates the formal educational syllabus of future financial experts and economists. This brings us back to the old fundamental idea of John Maynard Keynes that highlights the significance of psychological elements in decision-making under uncertainty that governs our lives.The full article can be viewed from the following link: https://www.mia.org.my/v2/Membership/services/accountants_today_details.aspx?ID=13

The Uncertainty of Standard of Value

National Accountants Conference (NAC) 2005 recognised accountants as the ‘managers of value’. However, this recognition carries with it a huge responsibility once we comprehend the notion of ‘value. Have we ever wondered that the value of money, our measuring rod, is indeed unstable and hence undependable? Do we understand how the uncertainty in the value of money affects the value of balance sheet items and the destiny of the company we are managing? To my fellow financial planners, do we care enough that our client’s destiny is uncertain as much as the uncertainty in the value of our measuring rod? Despite the recurring incidence of its instability, a currency remains our standard of value. Given the reality of our circumstances, it is beyond reasonable doubt that managing value is indeed a task beyond the conventional capacity of accountants.The full article can be viewed at this link: https://www.mia.org.my/v2/Membership/services/accountants_today_details.aspx?ID=11

The Theory of Uncertainty

In the business world, accountants are perceived as individuals with high levels of competency in decision-making involving economic criterion of costs versus benefits, measured in terms of monetary units. They are involved in the valuation of assets and liabilities which are tangible and intangible in nature. Accountants are essentially responsible to form reliable mathematical expectations concerning the future economic benefits and costs. However, in a practical sense, the future is uncertain at best. 'Uncertainty’ thus poses a big challenge to the practicality of the pseudo-mathematical approach to decision-making that dominates the formal educational syllabus of future financial experts and economists. This brings us back to the old fundamental idea of John Maynard Keynes that highlights the significance of psychological elements in decision-making under uncertainty that governs our lives.The full article can be viewed from the following link: https://www.mia.org.my/v2/Membership/services/accountants_today_details.aspx?ID=13