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Federal Reserve Bank of Chicago
Working Paper Series
Deregulation and the relationship between bank CEO compensation and risk taking
Elijah Brewer
William C. Hunter
William E. Jackson
Abstract

The deregulation of the banking industry during the 1990s provides a natural (public policy) experiment for investigating how firms adjust their executive compensation contracts as the environment in which they operate becomes relatively more competitive. Using the Riegle-Neal Act of 1994 as a focal point, we investigate how banks changed the equity-based component of bank CEO compensation contracts. We also examine the relationships between equity- based compensation and risk, capital structure, and investment opportunity set. Consistent with theoretical predictions, we find that after deregulation, the equity- based component of bank CEO compensation increases significantly on average for the industry. Additionally, we find that more risky banks have significantly higher levels of equity-based compensation, as do banks with more investment opportunities. But, more levered banks do not have higher levels of equity-based CEO compensation. Finally, we observe that most of these relationships become more powerful in our post- deregulation period.


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Elijah Brewer & William C. Hunter & William E. Jackson, Deregulation and the relationship between bank CEO compensation and risk taking, Federal Reserve Bank of Chicago, Working Paper Series WP-03-32, 2003.
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Keywords: Corporate governance ; Bank supervision
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