Abdelaziz Chazi

Compensation Vega, Deregulation, and Risk-Taking: Lessons from the US Banking Industry

This study examines three issues related to the sensitivity of bank CEO compensation to risk, or vega: (1) its relevance compared with CEO compensation vega in industrial firms; (2) its determinants; and (3) its effect on bank risk-taking. Using a sample of 156 U.S. bank holding companies (BHCs) and a benchmark sample of 544 industrial firms over the period 1993–2006, we find that the vega of CEO compensation in banking is of a much smaller magnitude than the vega of CEO compensation in industrial firms, despite an effort by BHCs to increase it since the mid-1990s. We also find that larger BHCs with better investment opportunities and those that operate in a deregulated environment reward their CEOs with a compensation that has a higher sensitivity to risk. Finally, our analyses show that BHCs in which CEOs receive a higher compensation vega assume a higher risk.

Investors’ Behavior in an Emerging, Tax-Free Market

ABSTRACT We provide empirical evidence on the stock market participants’ behavior in an emerging market, with a tax-free environment. Our results show that United Arab Emirates’ (UAE) investors exhibit overconfidence and home bias, and tend to sell prior winners and buy prior losers. We find that investors rely on familiarity and on their information channels to make decisions. The results indicate that investors are risk averse, especially after the global financial crisis, which has had contagion effect on UAE markets. Investors attribute this effect to the inability to manage systemic crisis and to problems of information asymmetry, insider trading, and lack of good governance during crisis.

Can Islamic Banks Have Their Own Benchmark

This paper attempts to answer whether Islamic banks can have their own benchmark rate. In so doing, the paper investigates the nature of the relationship Islamic interbank benchmark rate (IIBR) and its comparable conventional counterpart, London interbank offer rate (LIBOR). The dynamics of the two series are investigated to examine the stability of the spread between IIBR and LIBOR, referred to as ‘Islamic premium’ or ‘piety premium’. The findings suggest that there are both long-term and short-term dynamic relationships between the two rates providing significant evidence of their convergence and co-movement. Our results also show that the existence of the IIBR-LIBOR spread is a reflection of the cost of funding and profit potential of the participating IIBR rate-setters. We find that, in addition to the determinants of the credit spreads, fundamental news of the panel banks are dominant factors driving the ‘piety premium’. We argue that the Islamic banking industry is operating in a global context, where it is highly improbable that its rates can decouple from the global benchmarks. Given that Islamic banking products and their risk return profile are similar to conventional products, arbitrage activities force Islamic rates to converge with the global benchmark rates.