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Bank stability and managerial compensation

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  • Bai, Gang
  • Elyasiani, Elyas

Abstract

We investigate the relationship between insolvency risk and executive compensation for BHCs over the 1992–2008 period. We employ CEO compensation sensitivity to risk (vega) and pay-share inequality between the CEO and other executives as measures of compensation and employ a system model to account for the endogeneity problem between vega and risk. Five main results are obtained. First, CEO compensation sensitivity to risk of BHCs has risen in response to deregulation to resemble those of the industrial firms. Second, higher vegas lead to greater bank instability. Third, the association between bank stability and managerial compensation is bi-directional; higher vegas induce greater risk and vice versa. Fourth, BHCs in the next to the largest-size group increase CEO vegas the most and have the strongest potential to create instability. Fifth, increased pay-share inequality has effects opposite to those of the increase in vega; greater pay-share inequality is associated with greater stability.

Suggested Citation

  • Bai, Gang & Elyasiani, Elyas, 2013. "Bank stability and managerial compensation," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 799-813.
  • Handle: RePEc:eee:jbfina:v:37:y:2013:i:3:p:799-813
    DOI: 10.1016/j.jbankfin.2012.10.026
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    More about this item

    Keywords

    Executive compensation; Insolvency risk; Bank holding company; Pay inequality; Vega; Too big to fail;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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