Investment Horizon, Risk, and Compensation in the Banking Industry

Posted: 12 Jul 2013

See all articles by Gilad Livne

Gilad Livne

University of Exeter Business School

Garen Markarian

HEC - University of Lausanne

Maxim Mironov

IE Business School, IE University

Date Written: June 2013

Abstract

This paper examines the relation between the investment horizon of banks and their CEO compensation, and its consequences for risk and performance. We find that banks with short-term investment intensity pay more cash bonus, exhibit higher risk and perform more poorly than banks with longer-term investment intensity. This evidence is broadly consistent with the view that short-term means of compensation encouraged a short-term investment focus, which in turn led to both higher risk and resulted in poorer performance, culminating in the sub-prime crisis. The inverse risk-performance relation suggests pay schemes were incongruent with shareholders’ interest. Moreover, pay arrangements used in banks prior to the subprime crisis exposed banks to the ex-post settling up problem (the clawback problem).

Keywords: Investment horizon, Compensation, Risk, Performance, Claw-back

JEL Classification: M41, M43, G20, J33

Suggested Citation

Livne, Gilad and Markarian, Garen and Mironov, Maxim, Investment Horizon, Risk, and Compensation in the Banking Industry (June 2013). Journal of Banking and Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2292995

Gilad Livne

University of Exeter Business School ( email )

Streatham Court
Rennes Drive
Exeter, EX4 4JH
United Kingdom
+44(0)1392 724436 (Phone)

Garen Markarian (Contact Author)

HEC - University of Lausanne ( email )

UNIL Dorigny
Lausanne, Lausanne 1015
Switzerland

Maxim Mironov

IE Business School, IE University ( email )

Calle Maria de Molina 12, 4izda
Madrid, Madrid 28006
Spain

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
549
PlumX Metrics