Widespread losses during the recent financial crisis have raised concerns that equitybased CEO compensation (stocks and stock options) causes risky bank policies. This has led to the need to understand whether CEO pay can be re-structured such that it dampens risk-taking incentives. Against this background, this thesis analyses if debtbased compensation (also known as inside debt and consisting of pension benefits and deferred compensation) motivates CEOs to pursue risk-reducing bank policies. Over three decades of research into executive compensation has not explored the impact of inside debt, primarily due to lack of detailed data on inside debt which only became available after 2006 in the United States (US). The paucity of empirical work on inside debt is particularly unfortunate, given that the value of inside debt is often substantial. This dissertation provides one of the first empirical investigations into the impact of inside debt on bank risk-taking by determining whether CEO inside debt leads to less risky behaviour, through three policy decisions that are capable of increasing the overall risk of the bank. First, this thesis focuses on the payout policies of banks. Bank payouts divert cash to shareholders, while leaving behind riskier and less liquid assets to repay creditors in the future. Payouts, thus, constitute a type of risk-taking that benefits shareholders at the expense of creditors. The results presented in this thesis indicate that higher inside debt results in more conservative bank payout policies. Specifically, CEOs paid with more inside debt are more likely to cut payouts and to cut payouts by a larger amount. Reductions in payouts occur through a decrease in both dividends and repurchases. The results also hold over a sub-sample of banks which received government support in the form of the Troubled Asset Relief Program (TARP) where the link between risk-taking and payouts is of particular relevance because it involves wealth transfers from the taxpayer to shareholders. Second, this thesis tests the impact of inside debt on the risk implications of bank acquisitions. Bank acquisitions are large scale investment decisions that can affect bank risk. To this end, this thesis shows that higher inside debt holdings motivate CEOs to pursue acquisitions that result in lower bank default risk. It also prevents CEOs from using acquisitions to shift risk to the financial safety-net. Since the safety net is underwritten by the taxpayer, the results show that CEO inside debt has a measurable impact on the subsidy which bank shareholders obtain from taxpayers. Third, the thesis shows that inside debt plays a critical role in influencing bank capital holdings. Higher equity capital provides creditors with a larger loss-absorbing equity buffer to protect the value of their claims on bank cash flows. Ceteris paribus, higher equity protects creditors from losses. To this end, this thesis shows that higher inside debt results in motivating banks to hold higher capital, whether defined using regulatory or economic terms. Higher inside debt also results in reducing the estimated value of the taxpayer losses. Furthermore, banks with higher inside debt are at a lower risk of facing capital shortfalls. Taken together, the study provides insights on how incentives stemming from inside debt impact bank policies in a manner that protects creditor interests. Inside debt can help in addressing excessive risk-taking concerns by aligning the interests of CEOs with those of creditors, regulators, and the taxpayer. This thesis makes a novel contribution to the banking literature by providing evidence on the implications of inside debt in the US banking industry. This work should be interpreted as part of a wider body of research which demonstrates that inside debt matters for bank risk-taking and that this role of inside debt should be recognized more widely in ongoing discussions on compensation incentives in banking.

For more than a decade, to reduce the agency problem, various ways have been examined on how to align the interest of manager with shareholders. Evidence and empirical findings are conflicting on the agency problem. Recently, deferred compensation as one incentive compensation draws the attention as a means to incentivize CEOs to make them work for the firm. However, it is still not evident if deferred compensation has effect on aligning CEOs with the firm’s goal possibly due to the issue on data. Therefore, the first essay investigates if deferred compensation has the effect on the agency problem and on the firm performance improvement after dealing with the data issue. This paper mainly aims to investigate if there is the non-linear relationship between the investment choice problem and the deferred compensation as Jensen and Meckling (1976) claim. This paper concludes that deferred compensation from NQDC table has positive and significant effect on the firm performance and the investment choice problem. More importantly, following McConnell and Servaes (1990), this paper finds the curvilinear relationship between Tobin’s Q and the deferred compensation and can confirm Jensen and Meckling (1976) theoretical application. The second essay aims to clarify the understanding on the relationship between the firm’s cash holdings and its causes by introducing the more detailed relationship between cash holdings and macroeconomic uncertainty. While previous literature tries to explain the level of cash holdings mainly by the firm-level variables, this study considers the full impact of the macroeconomic uncertainty on the level of cash holdings by introducing the firm’s heterogeneous exposure to macroeconomic uncertainty to see if the heterogeneity can tell the difference in the change in the level of cash holdings. This paper finds that macroeconomic uncertainties measured by difference macroeconomic condition variables are significant and contribute to the change in cash holdings. Additionally, this paper shows that the firms’ different level of exposure to macroeconomic uncertainty can cause the different degree of cash holdings and that firms with the higher level of exposure have the higher level of cash holdings.