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Bankers' compensation and fair value accounting

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  • Livne, Gilad
  • Markarian, Garen
  • Milne, Alistair

Abstract

This paper examines the role of certain fair value accounting (FVA) outcomes in compensation of US bank CEOs. The use of FVA in compensation invites an agency cost--the clawback problem--if cash compensation is based on unrealized profits that may reverse in the future. At the same time FVA may be a good measure of current managerial effort and so be cash compensated. We find evidence consistent with a positive link between CEO cash bonus and fair value (FV) valuation of trading assets, managed for short-term profit, as well as (amongst banks with limited trading exposure) a positive link between CEO pay and FV valuations of available for sale (AFS) assets. We find no evidence that trading income is incrementally compensation relevant, indicating that compensation committees avoided the clawback problem for unrealized trading gains. The paper also provides evidence on the link between FVA outcomes and equity-based pay.

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  • Livne, Gilad & Markarian, Garen & Milne, Alistair, 2011. "Bankers' compensation and fair value accounting," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1096-1115, September.
    • Handle: RePEc:eee:corfin:v:17:y:2011:i:4:p:1096-1115
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    5. Mayordomo, Sergio & Rodriguez-Moreno, Maria & Peña, Juan Ignacio, 2014. "Derivatives holdings and systemic risk in the U.S. banking sector," Journal of Banking & Finance, Elsevier, vol. 45(C), pages 84-104.
    6. Daifei Yao & Majella Percy & Jenny Stewart & Fang Hu, 2018. "Determinants of discretionary fair value measurements: the case of Level 3 assets in the banking sector," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 58(2), pages 561-597, June.
    7. Marina Balboa & Germán López-Espinosa & Korok Ray & Antonio Rubia, 2012. "Executive Compensation and Systemic Risk: The Role of Non-Interest Income and Wholesale Funding," Faculty Working Papers 04/12, School of Economics and Business Administration, University of Navarra.
    8. Mehnaz, Laura & Rahman, Asheq & Kabir, Humayun, 2023. "Covenant violation concern and investors’ pricing of Level 3 fair value adjustments," Journal of Contemporary Accounting and Economics, Elsevier, vol. 19(3).
    9. DeFond, Mark & Hu, Jinshuai & Hung, Mingyi & Li, Siqi, 2020. "The effect of fair value accounting on the performance evaluation role of earnings," Journal of Accounting and Economics, Elsevier, vol. 70(2).
    10. Stavros Kourtzidis & Nickolaos G. Tzeremes, 2019. "Investigating the determinants of firm performance," European Journal of Management and Business Economics, Emerald Group Publishing Limited, vol. 29(1), pages 3-22, June.
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    12. Darren Henderson, 2022. "Fair values and compensation contracting: Evidence from real estate firms," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 49(5-6), pages 627-657, May.
    13. Johannes Thesing & Patrick Velte, 2021. "Do fair value measurements affect accounting-based earnings quality? A literature review with a focus on corporate governance as moderator," Journal of Business Economics, Springer, vol. 91(7), pages 965-1004, September.
    14. Marina Brogi & Valentina Lagasio, 2019. "Do bank boards matter? A literature review on the characteristics of banks' board of directors," International Journal of Business Governance and Ethics, Inderscience Enterprises Ltd, vol. 13(3), pages 244-274.
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    16. Agata Wieczorek, 2022. "The transparency of remuneration policy in financial holding companies based on the example of the UniCredit Group," Journal of Banking Regulation, Palgrave Macmillan, vol. 23(2), pages 173-198, June.
    17. Yao, Dai Fei (Troy) & Percy, Majella & Hu, Fang, 2015. "Fair value accounting for non-current assets and audit fees: Evidence from Australian companies," Journal of Contemporary Accounting and Economics, Elsevier, vol. 11(1), pages 31-45.
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    19. Beatty, Anne & Liao, Scott, 2014. "Financial accounting in the banking industry: A review of the empirical literature," Journal of Accounting and Economics, Elsevier, vol. 58(2), pages 339-383.

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