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Seeking Alpha, Taking Risk: Evidence from Non-executive Pay in U.S. Bank Holding Companies

Author

Listed:
  • Acharya, Viral

    (NYU)

  • Litov, Lubomir P.

    (University of AZ and University of PA)

  • Sepe, Simone M.

    (University of AZ and Institute for Advanced Studies in Toulouse)

Abstract

We investigate whether incentives provided to non-executives in U.S. bank holding companies (BHCs) in 2003-2006 are related to BHC risk and BHC value during the crisis of 2007-2009. To this end, we introduce measures of non-executive incentives based on the elasticity of BHC compensation, net of executive pay, to BHC performance. We find that higher non-executive compensation elasticity is associated with higher subsequent BHC risk and lower subsequent BHC value. These effects are robust to controlling for executive incentives. We also document that the association between non-executive incentives and BHC risk is mainly driven by incentives specific to peer group performance. Overall these findings support the hypothesis that bank competition for non-executives was largely responsible for the distortions in bank compensation and the accumulation of long-term risks that emerged during the crisis.

Suggested Citation

  • Acharya, Viral & Litov, Lubomir P. & Sepe, Simone M., 2014. "Seeking Alpha, Taking Risk: Evidence from Non-executive Pay in U.S. Bank Holding Companies," Working Papers 13-18, University of Pennsylvania, Wharton School, Weiss Center.
    • Handle: RePEc:ecl:upafin:13-18
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    File URL: http://fic.wharton.upenn.edu/fic/papers/13/13-18.pdf
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    3. Jokivuolle, Esa & Keppo, Jussi & Yuan, Xuchuan, 2015. "Bonus caps, deferrals and bankers' risk-taking," Research Discussion Papers 5/2015, Bank of Finland.
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    8. Gropp, Reint E. & Park, Kyounghoon, 2016. "To Separate or not to Separate Investment from Commercial Banking? An Empirical Analysis of Attention Distortion under Multiple Tasks," IWH Discussion Papers 2/2016, Halle Institute for Economic Research (IWH).
    9. repec:zbw:bofrdp:urn:nbn:fi:bof-201503041096 is not listed on IDEAS
    10. Jarque, Arantxa & Prescott, Edward Simpson, 2020. "Banker compensation, relative performance, and bank risk," Journal of the Japanese and International Economies, Elsevier, vol. 56(C).

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