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Outside monitoring and CEO compensation in the banking industry

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  • John, Kose
  • Mehran, Hamid
  • Qian, Yiming

Abstract

We hypothesize that CEO compensation is optimally designed to trade off two types of agency problems: the standard shareholder-management agency problem as well as the risk-shifting problem between shareholders and debtholders. Analyses in this setup produces two predictions: (1) the pay-for-performance sensitivity of CEO compensation decreases with the leverage ratio; and (2) the pay-for-performance sensitivity of CEO compensation increases with the intensity of outside monitoring on the firm's risk choice. We test these two hypotheses for the banking industry where regulators and nondepository (subordinated) debtholders provide outside monitoring on the risk choice. We construct an index of the intensity of outside monitoring based on three variables: subordinated debt rating, non performing loan ratio and examination rating assigned by regulators. We find supporting evidence for both hypotheses.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Corporate Finance.

Volume (Year): 16 (2010)
Issue (Month): 4 (September)
Pages: 383-399

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Handle: RePEc:eee:corfin:v:16:y:2010:i:4:p:383-399

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Web page: http://www.elsevier.com/locate/jcorpfin

Related research

Keywords: Corporate governance CEO compensation Pay-for-performance sensitivity Risk-shifting Agency problems Regulation Subordinated debt;

References

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Citations

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Cited by:
  1. Hagendorff, Jens & Vallascas, Francesco, 2011. "CEO pay incentives and risk-taking: Evidence from bank acquisitions," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1078-1095, September.
  2. Hendrik Hakenes & Isabel Schnabel, 2014. "Bank Bonuses and Bailouts," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(s1), pages 259-288, 02.
  3. Rüdiger FAHLENBRACH & René M. STULZ, . "Bank CEO Incentives and the Credit Crisis," Swiss Finance Institute Research Paper Series 09-27, Swiss Finance Institute.
  4. Dietl Helmut M & Duschl Tobias & Lang Markus, 2011. "Executive Pay Regulation: What Regulators, Shareholders, and Managers Can Learn from Major Sports Leagues," Business and Politics, De Gruyter, vol. 13(2), pages 1-32, August.
  5. Xavier Freixas & Jean-Charles Rochet, 2012. "Taming SIFIs," Working Papers 649, Barcelona Graduate School of Economics.
  6. Adams, Renée B. & Mehran, Hamid, 2012. "Bank board structure and performance: Evidence for large bank holding companies," Journal of Financial Intermediation, Elsevier, vol. 21(2), pages 243-267.
  7. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.
  8. Zhen Shi, 2011. "The Impact of Portfolio Disclosure on Hedge Fund Performance, Fees and Flows," NFI Working Papers 2011-WP-07, Indiana State University, Scott College of Business, Networks Financial Institute.
  9. David VanHoose, 2010. "Regulation of Bank Management Compensation," NFI Policy Briefs 2010-PB-06, Indiana State University, Scott College of Business, Networks Financial Institute.

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