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Deregulation and the relationship between bank CEO compensation and risk taking

Author

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  • Elijah Brewer
  • William C. Hunter
  • William E. Jackson

Abstract

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.

Suggested Citation

  • Elijah Brewer & William C. Hunter & William E. Jackson, 2003. "Deregulation and the relationship between bank CEO compensation and risk taking," Working Paper Series WP-03-32, Federal Reserve Bank of Chicago.
  • Handle: RePEc:fip:fedhwp:wp-03-32
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    File URL: http://www.chicagofed.org/digital_assets/publications/working_papers/2003/wp2003-32.pdf
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    6. Greif, Avner & Milgrom, Paul & Weingast, Barry R, 1994. "Coordination, Commitment, and Enforcement: The Case of the Merchant Guild," Journal of Political Economy, University of Chicago Press, vol. 102(4), pages 745-776, August.
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    Cited by:

    1. Belkhir, Mohamed & Boubaker, Sabri, 2013. "CEO inside debt and hedging decisions: Lessons from the U.S. banking industry," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 24(C), pages 223-246.
    2. Kero, Afroditi, 2013. "Banks’ risk taking, financial innovation and macroeconomic risk," The Quarterly Review of Economics and Finance, Elsevier, vol. 53(2), pages 112-124.
    3. Francis, Bill & Gupta, Aparna & Hasan, Iftekhar, 2015. "Impact of compensation structure and managerial incentives on bank risk taking," European Journal of Operational Research, Elsevier, vol. 242(2), pages 651-676.
    4. Jones, Jeffrey S. & Lee, Wayne Y. & Yeager, Timothy J., 2013. "Valuation and systemic risk consequences of bank opacity," Journal of Banking & Finance, Elsevier, vol. 37(3), pages 693-706.

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    Keywords

    Corporate governance ; Bank supervision;

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