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Banks v. Industrials: Executive Compensation, Securitization, and the Financial Crisis

43 Pages Posted: 27 Feb 2013 Last revised: 18 Feb 2016

Jonathan C. Lipson

Temple University Beasley School of Law

Rachel Martin

Utah State University - Huntsman School of Business

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems

Emre Unlu

University of Nebraska at Lincoln

Date Written: May 10, 2013

Abstract

We assess the effect that asset securitization has on executive compensation among banks and non-bank (“industrial”) firms. Securitization is the process whereby firms “sell” financial assets in transactions that bear many characteristics of a loan. Scholars and policy makers have expressed concern about the agency costs associated with such transactions because they inject liquidity that managers may be tempted to capture through excessive compensation.

Using a set of over 20,000 firm-year observations, we compare the effect that securitization has on CEO compensation at roughly 2,500 unique firms. We find that banks that securitize pay their executives more than banks that do not, and this difference is both statistically and economically significant. Interestingly, we find no meaningful difference when comparing the compensation practices of industrial firms that do and do not securitize. We attribute the difference between banks and industrials on these measures to special regulatory and informational attributes of banks.

Our findings advance understandings of the causes of the credit crisis, and have implications for ongoing debates about the scope and nature of efforts to reform both securitization and executive compensation.

Keywords: executive compensation, securitization, agency costs, liquidity, banks, industrial firms, bank regulation, Dodd-Frank

JEL Classification: K12, K22, K23

Suggested Citation

Lipson, Jonathan C. and Martin, Rachel and Matsumura, Ella Mae and Unlu, Emre, Banks v. Industrials: Executive Compensation, Securitization, and the Financial Crisis (May 10, 2013). Temple University Legal Studies Research Paper No. 2013-11. Available at SSRN: https://ssrn.com/abstract=2220810 or http://dx.doi.org/10.2139/ssrn.2220810

Jonathan C. Lipson (Contact Author)

Temple University Beasley School of Law ( email )

1719 N. Broad Street
Philadelphia, PA 19122
United States

Rachel Martin

Utah State University - Huntsman School of Business ( email )

3500 Old Main Hill
Logan, UT 84322-3500
United States
6082637720 (Phone)
6082637720 (Fax)

Ella Mae Matsumura

University of Wisconsin-Madison - Department of Accounting and Information Systems ( email )

School of Business
975 University Avenue
Madison, WI 53706
United States
608-262-9731 (Phone)
608-265-6040 (Fax)

Emre Unlu

University of Nebraska at Lincoln ( email )

Lincoln, NE 68588
United States

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