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Bank CEO Incentives and the Credit Crisis

  • Rüdiger Fahlenbrach
  • René M. Stulz

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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File URL: http://www.nber.org/papers/w15212.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15212.

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Date of creation: Aug 2009
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Publication status: published as Fahlenbrach, Rüdiger & Stulz, René M., 2011. "Bank CEO incentives and the credit crisis," Journal of Financial Economics, Elsevier, vol. 99(1), pages 11-26, January.
Handle: RePEc:nbr:nberwo:15212
Note: CF
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