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Bank CEO Incentives and the Credit Crisis

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  • Fahlenbach, Rudiger

    (Ecole Polytechnique Federale de Lausanne)

  • Stulz, Rene M.

    (Ohio State University and ECGI)

Abstract

We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

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Bibliographic Info

Paper provided by Ohio State University, Charles A. Dice Center for Research in Financial Economics in its series Working Paper Series with number 2009-13.

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Date of creation: Jul 2009
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Handle: RePEc:ecl:ohidic:2009-13

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