Institutional Ownership and Executive Compensation: Evidence from U.S. Banks During the Financial Crisis

Abstract

This paper examines the relation between institutional ownership and the compensation of executives at U.S. banking firms during the financial crisis period. We find that the monitoring role of institutional investors in shaping executive pay is different at banking firms than at general firms. We find that total executive compensation is increasing with institutional investors with potential business relations with the banking firms and decreasing with more independent institutional investors. Guardian funds such as foundations and trusts are the most effective monitors in terms of controlling the level of compensation. We also find evidence that specific types of institutional investors have different preferences for executive compensation mix (i.e., options vs. cash) and that this preference varies by type of executive (i.e. chief executive officer vs. chief financial officer).

Keywords: Institutional investor ownership, executive compensation, corporate governance, banks

JEL Classification: G30, G34