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Bank CEO Incentives and the Credit Crisis

RĂ¼diger Fahlenbrach
Swiss Federal Institute of Technology Lausanne; Ohio State University - Department of Finance; Swiss Finance Institute

Rene M. Stulz
Ohio State University - Department of Finance; National Bureau of Economic Research (NBER); European Corporate Governance Institute (ECGI)


December 17, 2009

Charles A Dice Center Working Paper No. 2009-13
Fisher College of Business Working Paper No. 2009-03-13
Swiss Finance Institute Research Paper No. 09-27
ECGI - Finance Working Paper No. 256/2009

Abstract:     
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 evidence that these banks actually performed worse both in terms of stock returns and in terms of accounting return on equity (ROE). Further, banks with higher option compensation and with a larger fraction of compensation given in the form of cash bonuses did not have worse performance during the crisis. All these results hold for banks that received TARP assistance as well as other banks that did not. The incentives of non-CEO top executives are unrelated to bank performance during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis; there is also no evidence that they hedged their equity exposure. Consequently, they suffered extremely large wealth losses as a result of the crisis.

Keywords: Financial crisis, CEO compensation, insider trading

JEL Classifications: G01, G21, G32

Working Paper Series

Date posted: July 28, 2009 ; Last revised: January 17, 2010

Suggested Citation

Fahlenbrach, RĂ¼diger and Stulz, Rene M., Bank CEO Incentives and the Credit Crisis (December 17, 2009). Charles A Dice Center Working Paper No. 2009-13; Fisher College of Business Working Paper No. 2009-03-13; Swiss Finance Institute Research Paper No. 09-27; ECGI - Finance Working Paper No. 256/2009. Available at SSRN: http://ssrn.com/abstract=1439859


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Contact Information

Rudiger Fahlenbrach (Contact Author)
Swiss Federal Institute of Technology Lausanne ( email )
Station 5
Odyssea 1.04
1015 Lausanne CH-1015
France
++41-21-693-0098 (Phone)
++41-21-693-0098 (Fax)
HOME PAGE: http://sfi.epfl.ch/page81836.html
Ohio State University - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
6142923217 (Phone)
6142922418 (Fax)
HOME PAGE: http://www.fisher.osu.edu/~fahlenbrach_1

Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva CH-6900
Switzerland

Rene M. Stulz
Ohio State University - Department of Finance ( email )
2100 Neil Avenue
Columbus, OH 43210-1144
United States
HOME PAGE: http://www.cob.ohio-state.edu/fin/faculty/stulz

National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
European Corporate Governance Institute (ECGI)
c/o ECARES ULB CP 114
B-1050 Brussels Belgium
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