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The Agency Problem Revisited: A Structural Analysis of Managerial Productivity and CEO Compensation in Large U.S. Commercial Banks

Author

Listed:
  • Liu, Shasha

    (Freddie Mac)

  • Sickles, Robin

    (Rice U)

Abstract

The paper analyzes performance, incentives, and the inefficiencies that may arise due to agency problems and market power using a newly developed panel of large U.S. commercial banks that have too-big-to-fail nature. We use a structural model to characterize managerial efficiency, which complements technical efficiency in standard stochastic frontier models. We incorporate managerial decisions, bank-specific characteristics, and market competition in deriving managerial efficiency. Data on the 50 largest commercial banks in the U.S. during 2000 and 2017 are collected from the Call Reports, and are matched with CEO compensation from S&P’s Execucomp database. The paper connects empirical evidence with economic theory and contributes to the literature on efficiency and management. The ultimate goal is to better understand the linkages among managerial performance, CEO compensation, and the size and scope of bank operations. Current results point to robust empirical findings. Economies of scale have steadily declined throughout the period, and are not positively related to managerial performance and CEO compensation. The size of a bank does not seem to be justified by the evidence in that larger banks offer larger bonuses and tend to have lower managerial efficiency and diminishing scale economies.

Suggested Citation

  • Liu, Shasha & Sickles, Robin, 2020. "The Agency Problem Revisited: A Structural Analysis of Managerial Productivity and CEO Compensation in Large U.S. Commercial Banks," Working Papers 20-001, Rice University, Department of Economics.
    • Handle: RePEc:ecl:riceco:20-001
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    Cited by:

    1. Cristian Barra & Anna Papaccio & Nazzareno Ruggiero, 2025. "Management Cost Efficiency and Technology Gap: Cooperative vs. Non-Cooperative Credit Banks," Journal of the Knowledge Economy, Springer;Portland International Center for Management of Engineering and Technology (PICMET), vol. 16(6), pages 18707-18737, December.
    2. V. K. Chetty & James J. Heckman, 2024. "Internal adjustment costs of firm-specific factors and the neoclassical theory of the firm," Advanced Studies in Theoretical and Applied Econometrics, in: Subal C. Kumbhakar & Robin C. Sickles & Hung-Jen Wang (ed.), Advances in Applied Econometrics, pages 239-258, Springer.
    3. Wu, Yanfei & Wu, Kai, 2025. "Beyond regular hours: Government overtime and new quality productivity of Chinese listed firms," Finance Research Letters, Elsevier, vol. 79(C).
    4. Alecos Papadopoulos, 2021. "Measuring the effect of management on production: a two-tier stochastic frontier approach," Empirical Economics, Springer, vol. 60(6), pages 3011-3041, June.
    5. Qi Li & Vasilis Sarafidis & Joakim Westerlund, 2021. "Essays in honor of Professor Badi H Baltagi," Empirical Economics, Springer, vol. 60(1), pages 1-11, January.
    6. Li, Qi & Sarafidis, Vasilis & Westerlund, Joakim, 2020. "Essays in Honor of Professor Badi H Baltagi: Editorial," MPRA Paper 104751, University Library of Munich, Germany.
    7. Robin C. Sickles & Kai Sun & Thomas P. Triebs, 2021. "The optimal use of management," Economic Inquiry, Western Economic Association International, vol. 59(3), pages 1346-1363, July.
    8. Natalya Zelenyuk & Robert Faff, 2022. "Effects of incentive pay on systemic risk: evidence from CEO compensation and CoVar," Empirical Economics, Springer, vol. 63(6), pages 3289-3311, December.
    9. Alberto Razul & Orlando Gomes & Mohamed Azzim Gulamhussen, 2024. "Bonuses, options, and bank strategies," SN Business & Economics, Springer, vol. 4(1), pages 1-28, January.

    More about this item

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • D22 - Microeconomics - - Production and Organizations - - - Firm Behavior: Empirical Analysis
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages

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