Bank CEOS, Inside Debt Compensation, and the Global Financial Crisis

1 Pages Posted: 16 Jul 2011

See all articles by Frederick Tung

Frederick Tung

Boston University School of Law

Xue Wang

Ohio State University - Fisher College of Business

Date Written: March 2011

Abstract

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

Tung, Frederick and Wang, Xue, Bank CEOS, Inside Debt Compensation, and the Global Financial Crisis (March 2011). Paolo Baffi Centre Research Paper No. 2011-101. Available at SSRN: https://ssrn.com/abstract=1885300 or http://dx.doi.org/10.2139/ssrn.1885300

Frederick Tung (Contact Author)

Boston University School of Law ( email )

765 Commonwealth Avenue
Boston, MA 02215
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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