Can Shareholder Litigation Discipline CEO Bonuses in the Financial Sector? The Role of Securities Class Actions

Abstract

The dynamics of executive compensation represents a critical issue, especially in the financial industry. There is evidence that even during the recent financial crisis CEOs were rewarded with disproportionate bonuses, a phenomenon that stands in vivid contrast with the wave of securities litigation that took place in that period as a consequence of managerial misbehaviour. This paper empirically investigates the relationship between securities class actions and the growth of CEO bonuses for financial intermediaries included in the S&P500 index in the period 1999-2010. We use an instrumental variable related to court behaviour in order to address problems arising from the endogenous nature of securities class actions with respect to CEO compensation. The analysis shows that the former are likely to moderate the dynamics of the latter, although the effect does not seem to persist through time.

Keywords: CEO compensation, securities class actions, financial sector, corporate governance

JEL Classification: G30, K22.