Hostname: page-component-7c8c6479df-5xszh Total loading time: 0 Render date: 2024-03-27T17:14:32.428Z Has data issue: false hasContentIssue false

Executive Compensation and Business Policy Choices at U.S. Commercial Banks

Published online by Cambridge University Press:  08 January 2013

Robert DeYoung
Affiliation:
rdeyoung@ku.edu, KU School of Business, University of Kansas, 1300 Sunnyside Ave, Lawrence, KS 66045;
Emma Y. Peng
Affiliation:
ypeng@fordham.edu,
Meng Yan
Affiliation:
myan@fordham.edu, Graduate School of Business, Fordham University, 1790 Broadway FL 13, New York, NY 10019.

Abstract

We show that contractual risk-taking incentives for chief executive officers (CEOs) increased at large U.S. commercial banks around 2000, when industry deregulation expanded these banks’ growth opportunities. Our econometric models indicate that CEOs responded positively to these incentives, especially at the larger banks best able to take advantage of these opportunities. Our results also suggest that bank boards responded to higher-than-average levels of risk by moderating CEO risk-taking incentives; however, this feedback effect is absent at the very largest banks with strong growth opportunities and a history of highly aggressive risk-taking incentives.

Type
Research Articles
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

References

Adams, R., and Mehran, H.Is Corporate Governance Different for Bank Holding Companies?Federal Reserve Bank of New York Economic Policy Review, 9 (2003), 123142.Google Scholar
Berger, P. G.; Ofek, E.; and Yermack, D. L.Managerial Entrenchment and Capital Structure Decisions.” Journal of Finance, 52 (1997), 14111438.CrossRefGoogle Scholar
Bettis, C.; Bizjak, J.; Coles, J.; and Kalpathy, S.Stock and Option Grants with Performance-Based Vesting Provisions.” Review of Financial Studies, 23 (2010), 38493888.CrossRefGoogle Scholar
Black, F., and Scholes, M.The Pricing of Options and Corporate Liabilities.” Journal of Political Economy, 81 (1973), 637654.CrossRefGoogle Scholar
Bushee, B. J. “The Influence of Institutional Investors on Myopic R&D Investment Behavior.” Accounting Review, 73 (1998), 305333.Google Scholar
Chen, C. R.; Steiner, T. L.; and Whyte, A. M.Does Stock Option-Based Executive Compensation Induce Risk-Taking? An Analysis of the Banking Industry.” Journal of Banking and Finance, 30 (2006), 915945.CrossRefGoogle Scholar
Cheng, I.-H.; Hong, H.; and Scheinkman, J. A.Yesterday’s Heroes: Compensation and Creative Risk-Taking.” Working Paper, Princeton University (2010).CrossRefGoogle Scholar
Clark, T.; Dick, A.; Hirtle, B.; Stiroh, K. J.; and Williams, R.The Role of Retail Banking in the U.S. Banking Industry: Risk, Return, and Industry Structure.” Federal Reserve Bank of New York Economic Policy Review, 13 (2007), 3956.Google Scholar
Coles, J. L.; Daniel, N. D.; and Naveen, L.Managerial Incentives and Risk-Taking.” Journal of Financial Economics, 79 (2006), 431468.CrossRefGoogle Scholar
Core, J., and Guay, W.The Use of Equity Grants to Manage Optimal Equity Incentive Levels.” Journal of Accounting and Economics, 28 (1999), 151184.CrossRefGoogle Scholar
Core, J., and Guay, W., “Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility.” Journal of Accounting Research, 40 (2002), 613630.CrossRefGoogle Scholar
Core, J. E., and Guay, W. R.Is There a Case for Regulating Executive Pay in the Financial Services Industry?” Working Paper, University of Pennsylvania (2010).CrossRefGoogle Scholar
Crawford, A. J.; Ezzell, J. R.; and Miles, J. A.Bank CEO Pay-Performance Relations and the Effects of Deregulation.” Journal of Business, 68 (1995), 231256.CrossRefGoogle Scholar
Datta, S.; Iskandar-Datta, M.; and Raman, K.Executive Compensation and Corporate Acquisition Decisions.” Journal of Finance, 56 (2001), 22992336.CrossRefGoogle Scholar
DeYoung, R., and Roland, K. P.Product Mix and Earnings Volatility at Commercial Banks: Evidence from a Degree of Total Leverage Model.” Journal of Financial Intermediation, 10 (2001), 5484.CrossRefGoogle Scholar
Edmans, A.; Gabaix, X.; and Landier, A.A Multiplicative Model of Optimal CEO Incentives in Market Equilibrium.” Review of Financial Studies, 22 (2009), 48814917.CrossRefGoogle Scholar
Fahlenbrach, R., and Stulz, R. M.Bank CEO Incentives and the Credit Crisis.” Journal of Financial Economics, 99 (2011), 1126.CrossRefGoogle Scholar
Fields, L. P., and Fraser, D. R.On the Compensation Implications of Commercial Bank Entry into Investment Banking.” Journal of Banking and Finance, 23 (1999), 12611276.CrossRefGoogle Scholar
Géczy, C. C.; Minton, B. A.; and Schrand, C. M.Taking a View: Corporate Speculation, Governance, and Compensation.” Journal of Finance, 62 (2007), 24052443.CrossRefGoogle Scholar
Guay, W. R. “The Sensitivity of CEO Wealth to Equity Risk: An Analysis of the Magnitude and Determinants.” Journal of Financial Economics, 53 (1999), 4371.CrossRefGoogle Scholar
Houston, J. F., and James, C.CEO Compensation and Bank Risk: Is Compensation in Banking Structured to Promote Risk Taking?Journal of Monetary Economics, 36 (1995), 405431.CrossRefGoogle Scholar
Hubbard, R. G., and Palia, D.Executive Pay and Performance: Evidence from the U.S. Banking Industry.” Journal of Financial Economics, 39 (1995), 105130.CrossRefGoogle Scholar
Hughes, J. P.; Lang, W.; Mester, L. J.; and Moon, C.Efficient Banking under Interstate Branching.” Journal of Money, Credit, and Banking, 28 (1996), 10451071.CrossRefGoogle Scholar
Jensen, M. C., and Meckling, W. H.Theory of the Firm: Managerial Behavior, Agency Costs and Ownership Structure.” Journal of Financial Economics, 3 (1976), 305360.CrossRefGoogle Scholar
Jensen, M. C., and Murphy, K. J.Performance Pay and Top-Management Incentives.” Journal of Political Economy, 98 (1990), 225264.CrossRefGoogle Scholar
John, T. A., and John, K.Top-Management Compensation and Capital Structure.” Journal of Finance, 48 (1993), 949974.Google Scholar
Knopf, J. D.; Nam, J.; and Thornton, J. H. Jr. “The Volatility and Price Sensitivities of Managerial Stock Option Portfolios and Corporate Hedging.” Journal of Finance, 57 (2002), 801813.CrossRefGoogle Scholar
McConnell, J. J., and Servaes, H.Additional Evidence on Equity Ownership and Corporate Value.” Journal of Financial Economics, 27 (1990), 595612.CrossRefGoogle Scholar
Merton, R. C. “Theory of Rational Option Pricing.” Bell Journal of Economics and Management Science, 4 (1973), 141183.Google Scholar
Minnick, K.; Unal, H.; and Yang, L.Pay for Performance? CEO Compensation and Acquirer Returns in BHCs.” Review of Financial Studies, 24 (2011), 439472.CrossRefGoogle Scholar
Morck, R.; Shleifer, A.; and Vishny, R. W.Management Ownership and Market Valuation: An Empirical Analysis.” Journal of Financial Economics, 20 (1988), 293315.CrossRefGoogle Scholar
Nam, J.; Ottoo, R. E.; and Thornton, J. H. Jr. “The Effect of Managerial Incentives to Bear Risk on Corporate Capital Structure and R&D Investment.” Financial Review, 38 (2003), 77101.CrossRefGoogle Scholar
Rogers, D. A. “Does Executive Portfolio Structure Affect Risk Management? CEO Risk-Taking Incentives and Corporate Derivatives Usage.” Journal of Banking and Finance, 26 (2002), 271295.CrossRefGoogle Scholar
Rossi, C. V. “Mortgage Banking Cost Structure: Resolving an Enigma.” Journal of Economics and Business, 50 (1998), 219234.CrossRefGoogle Scholar
Smith, C. W., and Stulz, R. M.The Determinants of Firms’ Hedging Policies.” Journal of Financial and Quantitative Analysis, 20 (1985), 391405.CrossRefGoogle Scholar
Smith, C. W. Jr., and Watts, R. L.The Investment Opportunity Set and Corporate Financing, Dividend, and Compensation Policies.” Journal of Financial Economics, 32 (1992), 263292.CrossRefGoogle Scholar
Stein, J. C.Information Production and Capital Allocation: Decentralized versus Hierarchical Firms.” Journal of Finance, 57 (2002), 18911921.CrossRefGoogle Scholar