• Corpus ID: 30598422

Non-Executive Incentives and Bank Risk-Taking Viral

@inproceedings{Acharya2013NonExecutiveIA,
  title={Non-Executive Incentives and Bank Risk-Taking Viral},
  author={Acharya and C Starr},
  year={2013}
}

• Acharya, C. Starr
• Published 2013
• Economics

Motivated by recent theoretical work, in this paper we empirically investigate (i) the determinants of nonexecutive compensation policies in U.S. bank holding companies (BHCs) and (ii) the impact of such policies on BHCs’ risk-taking. To this end, we develop a measure of non-executive compensation incentives based on the elasticity of BHC compensation–net of executive pay–to BHC performance. We find that BHCs with higher nonexecutive compensation elasticity before the financial crisis exhibited both higher enterprise risk and lower firm value during the crisis. After disentangling non-executive incentives into incentives specific to peer group performance and individual BHC performance, we find that the positive relationship between non-executives incentives and BHC enterprise risk is mainly driven by incentives specific to peer group performance. Overall our findings highlight that bank competition for non-executive services engendered a negative externality in banks’ non-executive compensation policies that largely contributed to the excessive bank risk-taking observed during the financial crisis. 1 We thank for their comments Thomas Bates, Dan Bernhardt, Sanjai Bhagat, Margaret Blair, Jacques Crémer, Jeff Coles, Dan Dhaliwal, Andra Ghent, Jeff Gordon, Kose John, Chris Lamoreux, Saura Masconale, Marco Pagano, Rick Sias, Lynn Stout, Charles Whitehead and seminar participants at the Federal Reserve Bank in St. Louis, Fordham University, University of Arizona, University of Naples, and Toulouse School of Economics. We also thank conference participants at the Cornell Law School “New Voices on Financial Market Regulation” Conference, the University of Arizona “Current Issues of Executive Compensation in the Financial Industry” Conference, and the American Law and Economics Association Conference at the Vanderbilt University. Lubomir Litov acknowledges financial support from the McGuire Center at the University of Arizona.