Deregulation and the Relationship Between Bank CEO Compensation and Risk-Taking
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 equitybased
CEO compensation. Finally, we observe that most of these relationships become
more powerful in our post-deregulation period.
