Deregulation and the Relationship between Bank CEO Compensation and Risk Taking

42 Pages Posted: 29 Apr 2004

See all articles by Elijah Brewer

Elijah Brewer

DePaul University - Department of Finance; Federal Reserve Bank of Chicago

William C. Hunter

Tippie College of Business; University of Connecticut - School of Business

William E. Jackson

Culverhouse College of Business, University of Alabama

Date Written: November 2003

Abstract

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity-based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity-based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post-deregulation period.

Keywords: Corporate governance, pay, performance, deregulation, banks

JEL Classification: G32, G34, G38, G21

Suggested Citation

Brewer, Elijah and Hunter, William Curt and Jackson, William E., Deregulation and the Relationship between Bank CEO Compensation and Risk Taking (November 2003). Available at SSRN: https://ssrn.com/abstract=486985 or http://dx.doi.org/10.2139/ssrn.486985

Elijah Brewer (Contact Author)

DePaul University - Department of Finance ( email )

1 East Jackson Blvd.
Chicago, IL 60604-2287
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Federal Reserve Bank of Chicago ( email )

230 South LaSalle Street
Chicago, IL 60604
United States

William Curt Hunter

Tippie College of Business ( email )

Acquisitions
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University of Connecticut - School of Business ( email )

Tippie College of Business
108 Pappajohn Business Bldg
Iowa City, IA 52242
United States
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William E. Jackson

Culverhouse College of Business, University of Alabama ( email )

Tuscaloosa, AL 35487-0225
United States
205.348.6217 (Phone)
205.348.6695 (Fax)

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