Equity-based Compensation and Manager's Risk-taking in Commercial Banks

Under the assumption of manager's risk-averse utility, this paper develops and analyses an agency theory model to examine the relationship between equity-based compensation and risk-taking of commercial bank. Our results indicate that the relationship is not usually monotonous, but the U-shaped: With the increasing of the equity compensation, during the initial phase, manager tends to increasingly take risks, but after a critical point, they become more and more conservative in risk-taking.