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Basel III and CEO compensation: a new regulation attempt after the crisis

  • Eufinger, Christian
  • Gill, Andrej

The paper analyzes the interaction between an endogenous capital structure and investment decision, and the incentive scheme of bank executives. We show that the implementation of capital requirements, which are contingent on compensation schemes, drive a wedge between the interests of the shareholder and the CEO. This non-alignment can mitigate excessive risk taking. In particular, linking the amount of insured debt to the ratio of fixed and performance based salary encourages first-best outcomes. We derive empirical predictions and policy implications.

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File URL: http://econstor.eu/bitstream/10419/62056/1/VfS_2012_pid_970.pdf
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Paper provided by Verein für Socialpolitik / German Economic Association in its series Annual Conference 2012 (Goettingen): New Approaches and Challenges for the Labor Market of the 21st Century with number 62056.

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Date of creation: 2012
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Handle: RePEc:zbw:vfsc12:62056
Contact details of provider: Web page: http://www.socialpolitik.org/
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  1. Fahlenbach, Rudiger & Stulz, Rene M., 2009. "Bank CEO Incentives and the Credit Crisis," Working Paper Series 2009-13, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
  2. Mitchell Berlin & Loretta J. Mester, 1990. "Debt covenants and renegotiation," Working Papers 90-21, Federal Reserve Bank of Philadelphia.
  3. Rangarajan K. Sundaram & David L. Yermack, 2007. "Pay Me Later: Inside Debt and Its Role in Managerial Compensation," Journal of Finance, American Finance Association, vol. 62(4), pages 1551-1588, 08.
  4. Jon Danielsson, 2000. "The Emperor has no Clothes: Limits to Risk Modelling," FMG Special Papers sp126, Financial Markets Group.
  5. Roman Inderst & Holger M. Mueller, 2006. "Informed Lending and Security Design," Journal of Finance, American Finance Association, vol. 61(5), pages 2137-2162, October.
  6. Lucian A. Bebchuk & Michael S. Weisbach, 2010. "The State of Corporate Governance Research," NBER Chapters, in: Corporate Governance National Bureau of Economic Research, Inc.
  7. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2010. "Executive compensation and risk taking," Staff Reports 456, Federal Reserve Bank of New York.
  8. John, Teresa A & John, Kose, 1993. " Top-Management Compensation and Capital Structure," Journal of Finance, American Finance Association, vol. 48(3), pages 949-74, July.
  9. Douglas W. Diamond & Raghuram G. Rajan, . "A Theory of Bank Capital," CRSP working papers 363, Center for Research in Security Prices, Graduate School of Business, University of Chicago.
  10. anonymous, 2008. "Federal Reserve Bank of Kansas City: 2007 annual report," TEN, Federal Reserve Bank of Kansas City, issue Spr, pages 37-81.
  11. Alex Edmans & Qi Liu, 2011. "Inside Debt," Review of Finance, European Finance Association, vol. 15(1), pages 75-102.
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