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Executive Pay Inefficiencies in the Financial Sector

Colorado College Working Paper No. 2010-02

8 Pages Posted: 6 Apr 2010  

Haley Barton

affiliation not provided to SSRN

Judith A. Laux

Colorado College - Department of Economics and Business

Date Written: April 5, 2010

Abstract

This study considers the implications of excessive non-salary-based executive pay on capital structure during the years 2005 through 2007, directly preceding the 2008 stock market crash. The hypothesis proposes that for firms in the financial sector, executives awarded generous compensation packages compared to salary implemented a higher use of debt in their firm’s capital structure. The study examines data on 40 firms in the financial sector and 40 firms in the manufacturing sector to empirically test for a relationship between executive pay and leverage. Cross-sectional analysis of nine models reveals that compensation is a significant determinant of a firm’s total debt-to-total assets ratio for the financial sector, especially with the existence of a one- to two- year lag between the variables, while the manufacturing sector yielded no significant relationship. These findings reveal sources of agency conflicts and behavioral biases within the financial sector during the three years preceding the financial collapse.

Keywords: Executive Compensation, Leverage, Agency Theory

JEL Classification: D23, D21, D82, G3, J3, M52

Suggested Citation

Barton, Haley and Laux, Judith A., Executive Pay Inefficiencies in the Financial Sector (April 5, 2010). Colorado College Working Paper No. 2010-02. Available at SSRN: https://ssrn.com/abstract=1584730 or http://dx.doi.org/10.2139/ssrn.1584730

Haley Barton

affiliation not provided to SSRN ( email )

Judith A. Laux (Contact Author)

Colorado College - Department of Economics and Business ( email )

14 E Cache La Poudre Street
Colorado Springs, CO 80903
United States
7193896414 (Phone)
7193896927 (Fax)

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