TITLE:
Does Compensation Drive Systemic Risk? Evidence from the Tunisian Banking Sector
AUTHORS:
Imen Fredj, Marjène Rabah Gana
KEYWORDS:
Systemic Risk, Executive Compensation, Bank-Risk Taking, Tunisian Banking Sector
JOURNAL NAME:
Theoretical Economics Letters,
Vol.11 No.4,
August
31,
2021
ABSTRACT: Weak and ineffective bank governance mechanisms are
identified as the main triggers of a financial crisis. One of the main issues
raised by researchers is the role of executive compensation in encouraging
risk-taking. We conduct this research to determine whether executive
compensation is an incentive for risk-taking and contributes to the overall
systemic risk for a sample including seven banks from the biggest private
Tunisian listed banks over the period 2009-2019. Based on the agency theory and
the moral hazard hypothesis, compensation is assumed to be an incentive for
interest and risk preferences alignment. Indeed, our results show that managers
are willing to take excessive risks that may increase systemic risk levels. Managers tend to be risk seeking
to increase bank performance and are motivated to keep their position, and
their job opportunities. Surprisingly, the robustness test highlights that only
fixed component is related to systemic risk measures suggesting that, provided
with fixed wages, managers feel safe and are not reluctant to invest in all
projects reporting positive net present value irrespective of their risk which
may result in excessive risk taking.