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Regulation of Compensation and Systemic Risk: Evidence from the UK

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  • ANYA KLEYMENOVA
  • İREM TUNA

Abstract

This paper studies the consequences of regulating executive compensation at financial institutions by examining the introduction of the UK Remuneration Code in 2010, which aimed to change the decision‐making horizon and risk‐taking incentives of bank executives. We find that, although both banks and nonbanks show increased contribution and sensitivity to systemic risk in the United Kingdom post‐2010, this increase is lower for UK banks, in line with the intent of the regulation. However, UK banks also experience higher unforced CEO turnover when compared to other UK firms. Therefore, while the regulation may have had the desired effect on systemic risk, it may also have given rise to some unintended consequences.

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  • Anya Kleymenova & İrem Tuna, 2021. "Regulation of Compensation and Systemic Risk: Evidence from the UK," Journal of Accounting Research, Wiley Blackwell, vol. 59(3), pages 1123-1175, June.
    • Handle: RePEc:bla:joares:v:59:y:2021:i:3:p:1123-1175
    DOI: 10.1111/1475-679X.12355
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    References listed on IDEAS

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    Cited by:

    1. Sakalauskaite, Ieva & Harris, Qun, 2022. "Measuring the effects of bank remuneration rules: evidence from the UK," Bank of England working papers 1008, Bank of England.
    2. Stefano Colonnello & Giuliano Curatola & Shuo Xia, 2024. "When Does Linking Pay to Default Reduce Bank Risk?," Working Papers 2024: 07, Department of Economics, University of Venice "Ca' Foscari".
    3. Colonnello, Stefano & Koetter, Michael & Wagner, Konstantin, 2023. "Compensation regulation in banking: Executive director behavior and bank performance after the EU bonus cap," Journal of Accounting and Economics, Elsevier, vol. 76(1).
    4. Arif, Salman & Donovan, John & Gopalan, Yadav & Morris, Arthur, 2024. "Pay for prudence," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    5. He, Dongwei & Wu, Yifan & Wang, Yifan & Xing, Xueyan, 2023. "Prudential regulation and bank performance: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 82(C).
    6. Chenli Yin & Dan Li & Maria Paz Salmador, 2022. "Institutional change of compensation policy and its impact on CEO turnover and firm performance," Review of Managerial Science, Springer, vol. 16(8), pages 2527-2552, November.

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