| dc.description.abstract | This dissertation includes two essays: the first essay discusses the impacts of the deposit insurance premium setting upon the bank’s risk-taking behavior; the second essay examines the influences of the executive’s risk-taking behavior upon the incentive alignment functions in the executive stock options (ESOs).
The fist essay analyzes the effect of premium rates on banks’’ incentives to join a deposit insurance scheme and their incentives to invest in risky projects under a voluntary deposit insurance scheme. We find that in order to maximize social welfare, the insurance agency must either set the premium rate to be low so as to attract all banks to join the insurance scheme, or not to have the deposit insurance at all. However, the low premium rate in the voluntary scheme does not balance the budget of the deposit insurance. We also show that in the compulsory deposit insurance scheme, however, it is possible to impose an optimal premium rate that can balance the insurance agency’’s budget and achieve the highest social welfare. The results also present the dominance of the compulsory scheme over the voluntary scheme in terms of maximizing social welfare and balancing the budget.
The second essay proposes a multi-repriceable model, which takes into consideration the departure, risk-taking behavior and early exercise on the part of the executive, to price the executive stock options (ESOs). We build a model with performance-based departure and a repricing mechanism, which differs from the previous setting in other works. We find that the repriceable ESOs value is greater than that in the typical ESOs grant without considering the executive’’s departure. This result asserts that the executive retention function of repriceable ESOs is a valid practice. However, when considering the executive’’s departure, the repriceable option gives the executive incentives to depart from his company and to exercise his ESOs earlier. Furthermore, the repriceable option also gives the executive an incentive to take risk, and the incentive to take risk in repriceable ESOs is weaker than that in typical ESOs. This result is distinct from the findings in former studies. This outcome may arise from the multi-repriceable mechanism, which results in the executive’’s early exercise so as to counteract the risk-taking effect in the repriceable ESOs. We also find that the effect of relaxing the repricing term on the repriceable ESOs’’ value is positive. | en_US |