Bank CEOS, Inside Debt Compensation, and the Global Financial Crisis
1 Pages Posted: 16 Jul 2011
Date Written: March 2011
Bank executives’ compensation has been widely identified as a culprit in the Global Financial Crisis. The structure of bankers’ equity-based incentive pay has been blamed for excessive short-term risk taking by banks. Attempting to improve alignment of managers’ interests with shareholders, policy makers and academics have proposed reforms, focusing almost exclusively on restructuring equity pay. In a recent prominent paper, Fahlenbrach and Stulz (2011) show that no association exists between better bank CEO-shareholder alignment before the Crisis and bank performance during the Crisis. We extend Fahlenbrach and Stulz (2011) by offering a new approach to investigating the link between banker compensation and the Global Financial Crisis. We hypothesize that bank CEOs’ inside debt holdings reduce risk taking and agency costs of debt within banks. Consistent with our hypothesis, we find that bank CEOs’ inside debt holdings preceding the Crisis are significantly positively associated with bank performance and significantly negatively associated with bank risk taking during the Crisis.
Keywords: financial crisis, CEO compensation, inside debt, banks, agency costs of debt
JEL Classification: G01, G21, G32
Suggested Citation: Suggested Citation