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Basel III and CEO compensation: a new regulation attempt after the crisis

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  • Eufinger, Christian
  • Gill, Andrej

Abstract

The paper analyzes the interaction between an endogenous capital structure and investment decision, and the incentive scheme of bank executives. We show that the implementation of capital requirements, which are contingent on compensation schemes, drive a wedge between the interests of the shareholder and the CEO. This non-alignment can mitigate excessive risk taking. In particular, linking the amount of insured debt to the ratio of fixed and performance based salary encourages first-best outcomes. We derive empirical predictions and policy implications. --

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Bibliographic Info

Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62056.

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Date of creation: 2012
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Handle: RePEc:zbw:vfsc12:62056

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Web page: http://www.socialpolitik.org/
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  1. Douglas W. Diamond & Raghuram G. Rajan, 1999. "A Theory of Bank Capital," NBER Working Papers 7431, National Bureau of Economic Research, Inc.
  2. Mitchell Berlin & Loretta J. Mester, 1990. "Debt covenants and renegotiation," Working Papers 90-21, Federal Reserve Bank of Philadelphia.
  3. anonymous, 2008. "Federal Reserve Bank of Kansas City: 2007 annual report," TEN, Federal Reserve Bank of Kansas City, issue Spr, pages 37-81.
  4. Alex Edmans & Qi Liu, 2011. "Inside Debt," Review of Finance, European Finance Association, vol. 15(1), pages 75-102.
  5. Inderst, Roman & Mueller, Holger M, 2005. "Informed Lending and Security Design," CEPR Discussion Papers 5185, C.E.P.R. Discussion Papers.
  6. Rüdiger Fahlenbrach & René M. Stulz, 2009. "Bank CEO Incentives and the Credit Crisis," NBER Working Papers 15212, National Bureau of Economic Research, Inc.
  7. Bebchuk, Lucian A. & Weisbach, Michael S., 2009. "The State of Corporate Governance Research," Working Paper Series 2009-21, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  8. Rangarajan K. Sundaram & David L. Yermack, 2007. "Pay Me Later: Inside Debt and Its Role in Managerial Compensation," Journal of Finance, American Finance Association, vol. 62(4), pages 1551-1588, 08.
  9. Jon Danielsson, 2000. "The Emperor has no Clothes: Limits to Risk Modelling," FMG Special Papers sp126, Financial Markets Group.
  10. John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 949-74, July.
  11. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
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