Colorado College Working Paper No. 2010-02
8 Pages Posted: 6 Apr 2010
Date Written: April 5, 2010
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: 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