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The Impact of Capital Requirements and Managerial Compensation on Bank Charter Value

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  • Darius Palia

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  • Robert Porter

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    Abstract

    This paper examines the joint impact of capital requirements and managerial incentive compensation on bank charter value and bank risk. Most of the previous literature in the area of banking and agency theory has focused on asymmetric information between either banks and regulators, (and therefore on the role of bank capital), or between bank shareholders and bank managers, (and therefore on the role of managerial ownership). In this paper we unify these issues and present empirical results from the regression of capital requirements jointly with measures of incentive compensation on Tobin's Q, our proxy for bank charter value, and on the standard deviation of total return, our proxy for bank risk. In a sample of 102 bank holding companies we find that capital levels are consistently a significant positive factor in determining bank charter value and a significant negative factor in determining risk. On the other hand, we find our six measures of incentive compensation to be generally insignificant relative to charter value but do provide some evidence consistent with a theory relating types of incentive compensation with risk.

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    Bibliographic Info

    Article provided by Springer in its journal Review of Quantitative Finance and Accounting.

    Volume (Year): 23 (2004)
    Issue (Month): 3 (November)
    Pages: 191-206

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    Handle: RePEc:kap:rqfnac:v:23:y:2004:i:3:p:191-206

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    Web page: http://springerlink.metapress.com/link.asp?id=102990

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    Cited by:
    1. Angelos Kanas, 2014. "The impact of prompt corrective action on the default risk of the U.S. commercial banking sector," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 43(2), pages 393-404, August.
    2. Shujun Ding & Zhenyu Wu & Yuanshun Li & Chunxin Jia, 2010. "Executive compensation, supervisory board, and China’s governance reform: a legal approach perspective," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 35(4), pages 445-471, November.
    3. David VanHoose, 2010. "Regulation of Bank Management Compensation," NFI Policy Briefs 2010-PB-06, Indiana State University, Scott College of Business, Networks Financial Institute.
    4. Ting-Fang Chiang & E-Ching Wu & Min-Teh Yu, 2007. "Premium setting and bank behavior in a voluntary deposit insurance scheme," Review of Quantitative Finance and Accounting, Springer, Springer, vol. 29(2), pages 205-222, August.
    5. Wahyoe Soedarmono & Philippe Rous & Amine Tarazi, 2011. "Bank Capital and Self-Interested Managers: Evidence from Indonesia," Working Papers hal-00918584, HAL.

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