Why Do Bank Holding Companies Purchase Bank-Owned Life Insurance?

48 Pages Posted: 9 Jul 2016 Last revised: 16 Jun 2020

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Travis Davidson

Ohio University - Department of Finance

Hongxia Wang

Coastal Carolina University

Date Written: June 9, 2020

Abstract

Bank-owned life insurance (BOLI) is life insurance purchased by bank holding companies (BHCs) for key employees, whose proceeds can be shared by the company and employees' heirs. We investigate whether and how executive compensation affects BOLI and whether BOLI use affects BHC performance. Using a sample of 2,041 firm-year observations from 2004 through 2013, we find a statistically significant positive relation between CEO compensation and BOLI, supporting the notion that BOLI is a complement to other forms of compensation. Further, we provide evidence that increases in BOLI, both relative to total assets and relative to other BHCs, benefit shareholders. This suggests the incentive effect of BOLI on BHC executives outweighs the potential agency problem of BOLI. The results are robust across various measures of BOLI and model specifications. Our results imply that ex-ante incentives embedded in BOLI motivate BHC managers to enhance shareholder value.

Keywords: Corporate governance, executive compensation, bank-owned life insurance (BOLI), bank holding company (BHC), BHC performance

JEL Classification: G21, G22, G34

Suggested Citation

Cole, Rebel A. and Davidson, Travis and Wang, Hongxia, Why Do Bank Holding Companies Purchase Bank-Owned Life Insurance? (June 9, 2020). Available at SSRN: https://ssrn.com/abstract=2807123 or http://dx.doi.org/10.2139/ssrn.2807123

Rebel A. Cole

Florida Atlantic University ( email )

College of Business
777 Glades Road
Boca Raton, FL 33431
United States
1-561-297-4969 (Phone)

HOME PAGE: http://rebelcole.com

Travis Davidson (Contact Author)

Ohio University - Department of Finance ( email )

640 Copeland
Athens, OH 45701
United States

Hongxia Wang

Coastal Carolina University ( email )

P.O. Box 261954
Conway, SC 29528-6054
United States
843-349-4146 (Phone)

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