Credit and Punishment: The Career Incentives of Wall Street Bankers
46 Pages Posted: 7 Nov 2016 Last revised: 7 Jul 2017
Date Written: March 24, 2017
This study examines the relationship between negative credit events (i.e., defaults, bankruptcies, and rating downgrades) and career turnover for Wall Street bankers underwriting syndicated loans. We construct a comprehensive dataset containing the identities and employment histories of nearly 1,500 bankers employed by major corporate banking departments from the period spanning 1994 to 2014. First, following a negative credit shock in a banker's portfolio, the banker is more likely to depart her bank, transition to a lower-ranked bank, and face a demotion in the future. The results continue to hold when we identify exogenous credit events due to collateral shocks to the borrower. In addition, we confirm that termination practices effectively incentivize bankers to impose stricter lending terms on future loans (i.e., more covenants and greater covenant strictness). Overall, our findings confirm that Wall Street bankers are disciplined for large-scale credit losses.
Keywords: Syndicated Loans, Credit Events, Career Outcomes, Loan Officers, Bank Risk Management
JEL Classification: G20, G21, G30, J24, J63
Suggested Citation: Suggested Citation