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Bank CEO Incentives and the Credit Crisis

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute

René M. Stulz

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

August 2009

NBER Working Paper No. w15212

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.

Number of Pages in PDF File: 34

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Date posted: August 11, 2009  

Suggested Citation

Fahlenbrach, Rüdiger and Stulz, René M., Bank CEO Incentives and the Credit Crisis (August 2009). NBER Working Paper No. w15212. Available at SSRN: http://ssrn.com/abstract=1444714

Contact Information

Rüdiger Fahlenbrach
Ecole Polytechnique Fédérale de Lausanne ( email )
Quartier UNIL-Dorigny
Extranef 211
1015 Lausanne, CH-1015
++41-21-693-0098 (Phone)
++41-21-693-3010 (Fax)
HOME PAGE: http://sfi.epfl.ch/fahlenbrach.html
Swiss Finance Institute ( email )
c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900

Rene M. Stulz (Contact Author)
Ohio State University (OSU) - 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)
B-1050 Brussels
Feedback to SSRN

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References:  22
Citations:  96

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