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Downside Risk and Agency Problems in the U.S. Financial Sector: Examining the Effect of Risk Incentives from 2007 to 2010

In the paper, Downside Risk and Agency Problems in the U.S. Financial Sector: Examining the Effect of Risk Incentives from 2007 to 2010, I consider risk incentives within financial institutions in the presence of two types of potential agency problems: the standard manager-shareholder agency problem and the risk-shifting problem between shareholders and society. First, I evaluate the effect of risk incentives on shareholder returns during the financial crisis. Next, I examine the relation between risk incentives and three downside risk statistics. Value-at-risk resembles a financial institution's tolerance to losses, expected shortfall resembles losses when the firm does poorly, and marginal expected shortfall resembles an institution's exposure to loss spillovers from its peers.

From 2007 to 2010, I document a relation between risk incentives and consecutive buy-and-hold returns that is insignificant during the crisis
The (Agency) Problem of Risk Incentives within Financial Institutions - The Harvard Law School Forum on Corporate Governance and Financial Regulation

http://bit.ly/eohkrI

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