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Securitization and Compensation in Financial Institutions

Author

Listed:
  • Roman Inderst
  • Sebastian Pfeil

Abstract

We analyze the interaction between financial institutions' internal compensation policy, the quality of loans, and their securitization decision. We show when mandatory deferred bonus pay makes incentives more commensurate with the longer term risk of their transactions and hence improves the quality of loans. We also show when it has the opposite effect. We further analyze when mandatory deferred compensation can complement a policy that requires financial institutions to retain a minimum exposure to their originated loans, and we discuss the impact of a tax on short-term bonus pay. Generally, our framework allows us to study the interaction of financial institutions' internal agency problems with the external agency problem that arises from securitization. Copyright 2013, Oxford University Press.

Suggested Citation

  • Roman Inderst & Sebastian Pfeil, 2013. "Securitization and Compensation in Financial Institutions," Review of Finance, European Finance Association, vol. 17(4), pages 1323-1364.
    • Handle: RePEc:oup:revfin:v:17:y:2013:i:4:p:1323-1364
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    File URL: http://hdl.handle.net/10.1093/rof/rfs032
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    Cited by:

    1. Pagès, Henri, 2013. "Bank monitoring incentives and optimal ABS," Journal of Financial Intermediation, Elsevier, vol. 22(1), pages 30-54.
    2. Larry D. Wall, 2020. "Is stricter regulation of incentive compensation the missing piece?," Journal of Banking Regulation, Palgrave Macmillan, vol. 21(1), pages 82-94, March.
    3. Zhang, Xiong, 2020. "Convertible tranche in securitization," The North American Journal of Economics and Finance, Elsevier, vol. 52(C).
    4. Eberhard Feess & Ansgar Wohlschlegel, 2018. "Bank capital requirements and mandatory deferral of compensation," Journal of Regulatory Economics, Springer, vol. 53(2), pages 206-242, April.
    5. Riachi, Ilham & Schwienbacher, Armin, 2013. "Securitization of corporate assets and executive compensation," Journal of Corporate Finance, Elsevier, vol. 21(C), pages 235-251.
    6. Colonnello, Stefano & Curatola, Giuliano & Hoang, Ngoc Giang, 2017. "Direct and indirect risk-taking incentives of inside debt," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 428-466.
    7. Inderst, Roman & Hoffmann, Florian & Opp, Marcus, 2014. "Regulating Deferred Incentive Pay," CEPR Discussion Papers 9877, Centre for Economic Policy Research.
    8. Thomas Bauer & Thomas Kourouxous & Peter Krenn, 2018. "Taxation and agency conflicts between firm owners and managers: a review," Business Research, Springer;German Academic Association for Business Research, vol. 11(1), pages 33-76, February.
    9. Domenico Rocco Cambrea & Stefano Colonnello & Giuliano Curatola & Giulia Fantini, 2019. "CEO investment of deferred compensation plans and firm performance," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 46(7-8), pages 944-976, July.
    10. Jeong-Bon Kim & Li Li & Mary L. Z. Ma & Frank M. Song, 2013. "CEO Option Compensation, Risk-Taking Incentives, and Systemic Risk in the Banking Industry," Working Papers 182013, Hong Kong Institute for Monetary Research.
    11. John Thanassoulis, 2013. "Industry Structure, Executive Pay, and Short-Termism," Management Science, INFORMS, vol. 59(2), pages 402-419, June.
    12. Pruijssers, Jorien Louise & Singer, Gallia & Singer, Zvi & Tsang, Desmond, 2023. "Social influence pressures and the risk preferences of aspiring financial market professionals," Journal of Accounting Education, Elsevier, vol. 62(C).

    More about this item

    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

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