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Title:The effect of employee stock options on bank investment choice, borrowing, and capital PDF Logo
Authors:Mehran, Hamid
Rosenberg, Joshua
Issue Date:2007
Series/Report no.:Staff Report, Federal Reserve Bank of New York 305
Abstract:In this paper, we assess the effects of CEO stock options on three key corporate policies for banks: investment choice, amount of borrowing, and level of capital. Using a sample of 549 bank-years for publicly traded banks from 1992 to 2002, we find that stock option grants lead CEOs to undertake riskier investments. In particular, higher levels of option grants are associated with higher levels of equity and asset volatility. Consistent with the role of options as a nondebt tax shield, we also show that option grants reduce the banks’ incentive to borrow as evidenced by lower levels of interest expense and federal funds borrowing. Furthermore, we demonstrate that increases in CEO and employee stock option grants result in increased bank capital levels, perhaps because option grants create a contingent liability for the firm that needs to be funded in advance
Subjects:CEO compensation, employee stock options, risk taking, banking firms, borrowing, bank capital
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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