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Why do bank holding companies purchase bank-owned life insurance?

Author

Listed:
  • Rebel A. Cole

    (Florida Atlantic University)

  • Travis Davidson

    (Ohio University)

  • Hongxia Wang

    (Coastal Carolina University)

Abstract

Bank-owned life insurance (BOLI) is life insurance purchased by bank holding companies (BHCs) for key employees, whose proceeds can be shared by the company and employees’ heirs. We investigate reported benefits of purchasing BOLI to shed light on the dramatic increase in BOLI assets using a sample of 2040 firm-year observations from 2004 to 2013. We document that a BHC owning BOLI enjoys an average annual earnings increase of $12.5 million and an estimated annual tax shield of $3.4 million. This tax shield is nearly twice the size of average total CEO compensation. We provide empirical evidence that BOLI complements other forms of executive compensation. We empirically test potential agency costs associated with using BOLI as compensation but find no evidence of such costs. Further investigation shows that BHCs use BOLI to attract talented executives and benefit shareholders. We conclude that the significant benefits documented in this study provide convincing rationale for the increasing use of BOLI in recent years.

Suggested Citation

  • Rebel A. Cole & Travis Davidson & Hongxia Wang, 2021. "Why do bank holding companies purchase bank-owned life insurance?," Review of Quantitative Finance and Accounting, Springer, vol. 57(1), pages 29-59, July.
    • Handle: RePEc:kap:rqfnac:v:57:y:2021:i:1:d:10.1007_s11156-020-00938-1
    DOI: 10.1007/s11156-020-00938-1
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    More about this item

    Keywords

    Corporate governance; Executive compensation; Bank-owned life insurance; Bank holding company; Bank holding company performance;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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