Deregulation and the relationship between bank CEO compensation and risk taking
AbstractThe deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.
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Bibliographic InfoPaper provided by Federal Reserve Bank of Chicago in its series Working Paper Series with number WP-03-32.
Date of creation: 2003
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This paper has been announced in the following NEP Reports:
- NEP-ALL-2004-01-18 (All new papers)
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- Kero, Afroditi, 2013. "Banks’ risk taking, financial innovation and macroeconomic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 112-124.
- Belkhir, Mohamed & Boubaker, Sabri, 2013. "CEO inside debt and hedging decisions: Lessons from the U.S. banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 223-246.
- Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2013. "Valuation and systemic risk consequences of bank opacity," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 693-706.
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