Investment horizon, risk, and compensation in the banking industry

Gilad Livne (), Garen Markarian and Maxim Mironov

Journal of Banking & Finance, 2013, vol. 37, issue 9, 3669-3680

Abstract: This paper examines the relation between the investment horizon of banks and their CEO compensation, and its consequences for risk and performance. We find that banks with short-term investment intensity pay more cash bonus, exhibit higher risk and perform more poorly than banks with longer-term investment intensity. This evidence is broadly consistent with the view that short-term means of compensation encouraged a short-term investment focus, which in turn led to both higher risk and resulted in poorer performance, culminating in the sub-prime crisis. The inverse risk-performance relation suggests pay schemes were incongruent with shareholders’ interest. Moreover, pay arrangements used in banks prior to the subprime crisis exposed banks to the ex-post settling up problem (the clawback problem).

Keywords: Investment horizon; Compensation; Risk; Performance; Clawback problem (search for similar items in EconPapers)
JEL-codes: G20 J33 M41 (search for similar items in EconPapers)
Date: 2013
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Citations: View citations in EconPapers (11)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:37:y:2013:i:9:p:3669-3680

DOI: 10.1016/j.jbankfin.2013.05.021

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