Bank CEO Incentives and the Credit Crisis

43 Pages Posted: 28 Jul 2009 Last revised: 27 Sep 2010

Rüdiger Fahlenbrach

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

René M. Stulz

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

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Date Written: August 12, 2010

Abstract

We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.

Keywords: Financial crisis, CEO compensation, CEO incentives, Insider trading

JEL Classification: G01, G21, G32

Suggested Citation

Fahlenbrach, Rüdiger and Stulz, René M., Bank CEO Incentives and the Credit Crisis (August 12, 2010). Journal of Financial Economics (JFE), Forthcoming; 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: https://ssrn.com/abstract=1439859 or http://dx.doi.org/10.2139/ssrn.1439859

Rüdiger Fahlenbrach (Contact Author)

Ecole Polytechnique Fédérale de Lausanne ( email )

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Rene M. Stulz

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)

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Cambridge, MA 02138
United States

European Corporate Governance Institute (ECGI)

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Belgium

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