Executive Compensation Restrictions: Do they Restrict Firms’ Willingness to Participate in TARP?
Cadman, B., Carter, M. E. and Lynch, L. J. (2012), Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?. Journal of Business Finance & Accounting, Forthcoming
Posted: 19 May 2010 Last revised: 23 Oct 2012
Date Written: July 15, 2012
We examine the implications of regulatory intervention in pay-setting, by studying whether executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influence banks’ participation in the program. We find that banks more likely to be impacted by the restrictions are less likely to participate in TARP. Among banks accepting funds, we find that the likelihood of repaying before the end of 2009 is positively related to CEO incentive compensation. We find greater subsequent executive turnover and lower pay increases in banks accepting funds, consistent with concerns about talent drain. We also find that proxies for self-serving behavior are related to declining funds, suggesting pay preservation as a potential motive. Despite the motives behind declining funding, we find no evidence that the restrictions limited the objectives of TARP based on banks’ financial health or lending and may have allowed the government to allocate funds more effectively.
Keywords: Troubled Asset Relief Program (TARP), financial institutions, executive compensation
JEL Classification: G21, G28, G32, G34, G38, J33
Suggested Citation: Suggested Citation