Bank executive compensation structure, risk taking and the financial crisis

Guo, Lin; Jalal, Abu; Khaksari, Shahriar

doi:10.1007/s11156-014-0449-1

Cited by 59 publications

(43 citation statements)

References 47 publications

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“…Since the global financial crisis and the collapse of the market in 2007-2008, scholars have renewed interest in executive compensation levels and shifted their research focus from the non-financial industry to the financial industry (Guo et al, 2015). Executive compensation is the compensation plan given to the Chief Executive Officers (CEO) and other senior executives who are responsible for managing corporate affairs (Omoregie and Kelikume, 2017).…”

Section: Executive Compensationmentioning

confidence: 99%

Determinants of economic value added (EVA) in Chinese listed banks

Zhang

Aboud

2019

ARA

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Purpose The purpose of this paper is to examine the determinants of the EVA performance evaluation model for the Chinese banking industry. The authors investigate the impact of six bank-specific factors and corporate governance factors on financial performance. Design/methodology/approach The authors use the ordinary least square regression to examine the determinants of the EVA performance evaluation model for the Chinese banking industry. The findings are generally robust to alternative proxies of performance. Findings The empirical results indicate that credit risk, operational efficiency and the degree of innovation are positively related to banks’ EVA while capital management has a negative impact on it. In addition, although board size and independent directors are not related to the bank’s EVA, from the perspective of the traditional performance evaluation indicators, executive compensation has a positive impact on the bank’s profitability. Research limitations/implications This paper has some limitations. First, due to the large number of adjustments to accounting items are required in the application of EVA when evaluating business performance, some items of the EVA model in this paper have been simplified, which may cause the bank’s EVA value to deviate slightly from the actual situation. Moreover, the sample includes only listed banks, so our results cannot generalize to non-listed banks, such as some small- and medium-sized commercial banks. Originality/value This paper contributes to the limited body of literature concerning the use and the determinants of EVA in emerging markets. The authors construct an EVA model which is suitable for China’s banks and reports comprehensive evidence on the drivers of EVA as a measurement tool.

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Section: Executive Compensationmentioning

confidence: 99%

Determinants of economic value added (EVA) in Chinese listed banks

Zhang

Aboud

2019

ARA

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“…Girma et al (2007) pointed out a weak association between pay and performance. Guo et al (2014) confirmed this weak association between CEO remuneration and US bank performance during the financial crisis period (2007)(2008). Based on a sample of 306 financial institutions in 31 countries, Hung and Matos 2012found that financial institutions that used compensation contracts (bonuses) took more risk and performed worse during the crisis period.…”

Section: Executive Compensationmentioning

confidence: 71%

The Mutual Impacts of Corporate Governance Dimensions and Legal Protection Systems on the Performance of European Banks: A Post-Crisis Study

El-Chaarani¹

2017

ERSJ

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The paper provides new evidence on the relation between corporate governance practices, legal rights and European banks' performance during the post-crisis period. Using a sample of 935 banks in 30 European countries, the results reveal that at a high level of legal protection European banks are more able to follow the international recommendations and codes of corporate governance practices and vice-versa. Additional analysis shows that all the corporate governance variables have the same impacts on the banks' performance. At low, middle and high levels of legal protection, the results reveal positive impacts of committees' number (such as remuneration, nomination and audit committee) and independent members of banks' boards. The other dimensions of corporate governance (ownership concentration, executive pay and CEO duality) do not have any impact on bank performance. Only at the low level of legal protection the results show a negative impact on board size on European banks' performance.

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“…Our analysis is closely related to the prior literature addressing the effects of managerial compensation structures on bank performance and risk-taking. 2 Previous studies have examined how different elements of top executive compensation and the incentives generated by managerial compensation structures are reflected in the riskiness of financial institutions (e.g., Chen et al 2006;DeYoung et al 2013;Guo et al 2015;Minhat and Abdullah 2016;Gande and Kalpathy 2017;Bharati and Jia 2018). Using data on U.S. commercial banks, Chen et al (2006) document that option-based compensation and the option-based wealth of bank CEOs induce greater risk-taking.…”

Section: Chairman Ben S Bernanke (Board Of Governors Of the Federal mentioning

confidence: 99%

“…Their findings also suggest that banks with higher CEO compensation sensitivities to volatility are associated with higher levels of systematic and idiosyncratic risk and are more involved with non-traditional banking activities. Guo et al (2015) examine the relation between CEO compensation structure and bank risk-taking, and find that a higher proportion of incentive compensation increases default risk and stock return volatility.…”

Section: Chairman Ben S Bernanke (Board Of Governors Of the Federal mentioning

confidence: 99%

“…Our study builds upon several strands of research. In addition to the prior literature addressing the effects of managerial compensation structures on bank performance and risk-taking discussed in the introduction (e.g., Chen et al 2006;DeYoung et al 2013;Guo et al 2015;Minhat and Abdullah 2016;Gande and Kalpathy 2017;Bharati and Jia 2018), our empirical analysis is closely related to three broad streams of research. First, we draw on the prior literature examining the linkages between executive compensation policies and firm risktaking.…”

Section: Related Literaturementioning

confidence: 99%

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Managerial risk-taking incentives and the systemic risk of financial institutions

Iqbal

Vähämaa

2018

Rev Quant Finan Acc

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This paper examines whether the systemic risk of financial institutions is associated with the risk-taking incentives generated by executive compensation. We measure managerial risk-taking incentives with the sensitivities of chief executive officer (CEO) and chief financial officer (CFO) compensation to changes in stock prices (pay-performance sensitivity) and stock return volatility (pay-risk sensitivity). Using data on large U.S. financial institutions over the period 2005-2010, we document a negative association between systemic risk and the sensitivities of CEO and CFO compensation to stock return volatility. However, our results also demonstrate that financial institutions with greater managerial risk-taking incentives were associated with significantly higher levels of systemic risk during the peak of the financial crisis in 2008. We further document that the relation between pay-performance sensitivity and systemic risk is essentially nonexistent. Overall, our empirical findings indicate that the association between managerial risk-taking incentives and banks' systemic risk is ambiguous and is not stable over time.

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Bank executive compensation structure, risk taking and the financial crisis

Cited by 59 publications

References 47 publications

Determinants of economic value added (EVA) in Chinese listed banks

Determinants of economic value added (EVA) in Chinese listed banks

The Mutual Impacts of Corporate Governance Dimensions and Legal Protection Systems on the Performance of European Banks: A Post-Crisis Study

Managerial risk-taking incentives and the systemic risk of financial institutions

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