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Title:Regulation, subordinated debt, and incentive features of CEO compensation in the banking industry PDF Logo
Authors:John, Kose
Mehran, Hamid
Qian, Yiming
Issue Date:2007
Series/Report no.:Staff Report, Federal Reserve Bank of New York 308
Abstract:We study CEO compensation in the banking industry by considering banks’ unique claim structure in the presence of two types of agency problems: the standard managerial agency problem and the risk-shifting problem between shareholders and debtholders. We empirically test two hypotheses derived from this framework: that the pay-for-performance sensitivity of bank CEO compensation (1) decreases with the total leverage ratio and (2) increases with the intensity of monitoring provided by regulators and nondepository (subordinated) debtholders. We construct an index of the intensity of outsider monitoring based on four variables: the subordinated debt ratio, subordinated debt rating, nonperforming loan ratio, and BOPEC rating (regulators’ assessment of a bank’s overall health and financial condition). We find supporting evidence for both hypotheses. Our results hold after controlling for the endogeneity among compensation, leverage, and monitoring; they are robust to various regression specifications and sample criteria.
Subjects:banking, regulation, subordinated debt, CEO compensation, pay-for-performance sensitivity, risk shifting, agency problems
JEL:G21
G34
J33
Document Type:Working Paper
Appears in Collections:Staff Reports, Federal Reserve Bank of New York

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