Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?

Abstract

We examine the implications of regulatory intervention in pay‐setting, by studying whether executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influence banks’ participation in the program. We find that banks more likely to be impacted by the restrictions are less likely to participate in TARP. Among banks accepting funds, we find that the likelihood of repaying before the end of 2009 is positively related to CEO incentive compensation. We find greater subsequent executive turnover and lower pay increases in banks accepting funds, consistent with concerns about talent drain. We also find that proxies for self‐serving behavior are related to declining funds, suggesting pay preservation as a potential motive. Despite the motives behind declining funding, we find no evidence that the restrictions limited the objectives of TARP based on banks’ financial health or lending and may have allowed the government to allocate funds more effectively.

CEO compensation and banks’ risk-taking during pre and post financial crisis periods

“…The existing literature (e.g., Cadman et al, 2012;Elyasiani et al, 2011) is limited to studying the impact of TARP on banks' risk-taking, and report contradictory findings.…”

Employee-Based Brand Equity: Why Firms with Strong Brands Pay Their Executives Less

“…Many of the recommendations from these discussions call for increased government regulation of executive pay (see Cadman, Carter, and Lynch 2012;The Economist 2013). As executive pay levels seem to reach ever higher, they have fueled a heated debate and a torrent of academic studies in management, finance, and economics.…”

Does Government Intervention Affect Banking Globalization?

“…Bayazitova and Shivdasani (2012) and Wilson and Wu (2012) find that banks with high levels of CEO pay were more likely to exit TARP early. Furthermore, Cadman, Carter and Lynch (2012) find that firms that would have been relatively more affected by the associated pay restrictions were less likely to accept TARP. Finally, Duchin and Sosyura (2012) find that strong political connections increased the probability that a bank would receive TARP funds.…”