Journal of Statistics and Information

Bank default risk is a key indicator for measuring the vulnerability of banks.Existing research has pointed out that CEO compensation incentives are related to a bank's risk-taking, but the research on the two components of CEO equity incentives, CEO delta and CEO vega, is relatively lacking.By constructing the default distance indicator to measure bank default risk, this paper specifically explores the roles of CEO delta and CEO vega in default risk.CEOs equity-based compensations have two distinguished incentives: CEO delta and CEO vega.The empirical results show that CEO vega is positively associated with default risk.However, there is no significant association between default risk and CEO delta.After controlling for the effects of other CEO equity-based components, the empirical results remain robust, this indicates that CEO equity-based incentives significantly influence a bank's default risk.In the period after the passage of the GLB Act, CEO vega has a significant impact on default risk.The empirical analysis further explores the relationship between the impact of CEO vega on default risk and the risk-shifting hypothesis.By dividing banks into high-risk and low-risk groups, it is found that the impact of CEO vega on default risk is weaker for high-risk banks.Moreover, the effect of CEO vega is weaker in high-risk banks.The main innovations are focused on three aspects.First, the impacts of the two different incentive effects, CEO delta and CEO vega, is examined within equity-based incentives on default risk.Existing research focus more on how to use equity incentives to mitigate agency conflicts.However, for the banking industry, while equity incentives can alleviate principal-agent problems, at the cost of increased default risk.Therefore, when designing equity-based incentive policies, banks need to consider both the different incentive effects and default risk.This paper also studies whether the effects of equity-based incentives are influenced by the bank's own risk condition, and finds that when the default risk is higher, the marginal impact of CEO vega is weaker.The empirical findings have implications for corporate governance and risk management in the banking industry.First, given the unique characteristics of the banking industry, when designing equity-based incentives for bank executives, it is necessary to differentiate the different effects of equity-based incentives on default risk and incorporate into the bank's overall risk management considerations.Second, when equity-based incentives are used to reduce agency problems and encourage bank executives to explore innovations, it is necessary to take default risks into consideration.