Sunday, March 14, 2010
Bank CEOS, Inside Debt Compensation, and the Financial Crisis, by Frederick Tung, Emory University - School of Law, and Xue Wang, Emory University - Goizueta Business School, was recently posted on SSRN. Here is the abstract:
Bank executives’ compensation has been widely identified as a culprit in the Financial Crisis. The structure of banker pay, equity-based compensation in particular, has been blamed for excessive short-term risk taking by banks, and policy makers and academics have proposed reforms. In a recent prominent paper, Fahlenbrach and Stulz (2009) show that no association exists between better bank CEO-shareholder alignment before the Crisis and bank performance during the Crisis. We extend Fahlenbrach and Stulz (2009) by offering a new approach to investigating the link between banker compensation and the Financial Crisis. We hypothesize that bank CEOs’ inside debt holdings reduce risk taking and agency costs of debt within banks. Consistent with our hypothesis, we find that bank CEOs’ inside debt holdings preceding the Financial Crisis are significantly positively associated with bank performance and significantly negatively associated with bank risk taking during the Crisis.