Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry

ScienceDirect - Journal of Banking & Finance : Does stock option-based executive compensation induce risk-taking? An analysis of the banking industry: "We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks. We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock option-based compensation. As a result, the structure of executive compensation induces risk-taking, and the stock of option-based wealth also induces risk-taking. The results are robust across alternative risk measures, statistical methodologies, and model specifications. Overall, our results support a management risk-taking hypothesis over a managerial risk aversion hypothesis. Our results have important implications for regulators in monitoring the risk levels of banks. We investigate the relation between option-based executive compensation and market measures of risk for a sample of commercial banks during the period of 1992–2000. We show that following deregulation, banks have increasingly employed stock"

Noel Edmonds and the equity premium

Excellent overview of the equity risk premium Stumbling and Mumbling: Noel Edmonds and the equity premium: "Here’s another charge we can add to the list of complaints against Noel Edmonds – he’s deepening the equity premium puzzle."

Persuasion in Finance

SSRN-Persuasion in Finance by Sendhil Mullainathan, Andrei Shleifer:

"Persuasion is a fundamental part of social activity, yet it is rarely studied by economists. We compare the traditional economic model, in which persuasion is communication of objectively valuable information, with a behavioral model, in which persuasion is an effort to fit the message into the audience's already held beliefs. We present a simple formalization of the behavioral model, and compare the two models using data on financial advertising in Money and Business Week magazines over the course of the internet bubble. The evidence on the content of the persuasive messages is broadly consistent with the behavioral model of persuasion. "

Innovaton in Economics

The Economist talks about the attempt to bring entrepreneurship back into economic theory. I would think that there is a role for innovation in the competitive struggle for product differentiation and for cost reduction. This is part of the struggle to move from a competitive situation towards one where there is market power.
Economics focus: "William Baumol, who holds positions at both Princeton and NYU, has been labouring for years to create more space for entrepreneurship and innovation in economic theory. At this year's annual meeting of the American Economics Association, three special sessions on entrepreneurship were held in his name*. Mr Baumol's work in turn pays homage to the insights of Joseph Schumpeter, for whom the settled equilibria and smooth adjustments of microeconomics held little interest"

Housing and savings

Housing Hopes and Worries

This survey, originally from the LA Times and Bloomberg, gives a very clear idea that most people see housing as an investment or savings decision rather than just the purchase of housing services. It would be intereting to look at the savings ratio if we adjusted for the fact that this expenditure may actually be savings. The countries with strong increases in property prices (because of increased demand) also seem to be the ones with a fall in savings ratios under the traditional method of measurement.

Real Exchange Rate Volatility and the Gold Standard

Take a look at the gold standard as a means of stabilising the economy.
SSRN-Stuck on Gold: : "Did adoption of the gold standard exacerbate or diminish macroeconomic volatility? "

Comparisons of social mobility

SSRN-American Exceptionalism in a New Light: A Comparison of Intergenerational Earnings Mobility in the Nordic Countries, the United Kingdom and the United States by Markus J�ntti, Bernt Bratsberg, Knut R�ed, Oddbj�rn Raaum, Robin Naylor: "We develop methods and employ similar sample restrictions to analyse differences in intergenerational earnings mobility across the United States, the United Kingdom, Denmark, Finland, Norway and Sweden"

The paper suggests that there is little mobility and that the mobility is actually less in the US and UK than in nordic countries.