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Investment horizon, risk, and compensation in the banking industry

  • Livne, Gilad
  • Markarian, Garen
  • Mironov, Maxim

This paper examines the relation between the investment horizon of banks and their CEO compensation, and its consequences for risk and performance. We find that banks with short-term investment intensity pay more cash bonus, exhibit higher risk and perform more poorly than banks with longer-term investment intensity. This evidence is broadly consistent with the view that short-term means of compensation encouraged a short-term investment focus, which in turn led to both higher risk and resulted in poorer performance, culminating in the sub-prime crisis. The inverse risk-performance relation suggests pay schemes were incongruent with shareholders’ interest. Moreover, pay arrangements used in banks prior to the subprime crisis exposed banks to the ex-post settling up problem (the clawback problem).

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Article provided by Elsevier in its journal Journal of Banking & Finance.

Volume (Year): 37 (2013)
Issue (Month): 9 ()
Pages: 3669-3680

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Handle: RePEc:eee:jbfina:v:37:y:2013:i:9:p:3669-3680
Contact details of provider: Web page: http://www.elsevier.com/locate/jbf

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