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Bank CEO Incentives and the Credit Crisis

  • Rüdiger FAHLENBRACH

    (Ecole Polytechnique Fédérale de Lausanne (EPFL) and Swiss Finance Institute)

  • René M. STULZ

    (The Ohio State University, Fisher College of Business and NBER)

We investigate whether bank performance during the credit crisis of 2008 is related to CEO incentives and share ownership before the crisis and whether CEOs reduced their equity stakes in their banks in anticipation of the crisis. There is no evidence that banks with CEOs whose incentives were better aligned with the interests of their shareholders performed better during the crisis and some evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity. Further, option compensation did not have an adverse impact on bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; further, there is no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

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Paper provided by Swiss Finance Institute in its series Swiss Finance Institute Research Paper Series with number 09-27.

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Length: 37 pages
Date of creation:
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Handle: RePEc:chf:rpseri:rp0927
Contact details of provider: Web page: http://www.SwissFinanceInstitute.ch

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