Executive Compensation, Bank-Owned Life Insurance, and Bank Holding Company Performance

49 Pages Posted: 9 Jul 2016 Last revised: 14 Jul 2016

See all articles by Rebel A. Cole

Rebel A. Cole

Florida Atlantic University

Travis Davidson

Ohio University - Department of Finance

Hongxia Wang

Ashland University

Date Written: July 7, 2016

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, Executive Compensation, Bank-Owned Life Insurance, and Bank Holding Company Performance (July 7, 2016). 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

Ashland University ( email )

Ashland, OH 44805
United States
419-289-5222 (Phone)

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