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 chief executive officer (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.
