Credit and Punishment: The Career Incentives of Wall Street Bankers

46 Pages Posted: 7 Nov 2016 Last revised: 7 Jul 2017

See all articles by Janet Gao

Janet Gao

Indiana University - Kelley School of Business

Kristoph Kleiner

Indiana University - Kelley School of Business - Department of Finance

Joseph Pacelli

Indiana University - Kelley School of Business - Department of Accounting

Date Written: March 24, 2017

Abstract

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

Gao, Janet and Kleiner, Kristoph and Pacelli, Joseph, Credit and Punishment: The Career Incentives of Wall Street Bankers (March 24, 2017). Kelley School of Business Research Paper No. 16-81. Available at SSRN: https://ssrn.com/abstract=2865194 or http://dx.doi.org/10.2139/ssrn.2865194

Janet Gao

Indiana University - Kelley School of Business ( email )

1309 East Tenth Street
Indianapolis, IN 47405-1701
United States

Kristoph Kleiner

Indiana University - Kelley School of Business - Department of Finance ( email )

1309 E. 10th St.
Bloomington, IN 47405
United States

Joseph Pacelli (Contact Author)

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

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