Why do bank holding companies purchase bank-owned life insurance?

Rebel Cole, Travis Davidson () and Hongxia Wang
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Travis Davidson: Ohio University
Hongxia Wang: Coastal Carolina University

Review of Quantitative Finance and Accounting, 2021, vol. 57, issue 1, No 2, 29-59

Abstract: Abstract Bank-owned life insurance (BOLI) is life insurance purchased by bank holding companies (BHCs) for key employees, whose proceeds can be shared by the company and employees’ heirs. We investigate reported benefits of purchasing BOLI to shed light on the dramatic increase in BOLI assets using a sample of 2040 firm-year observations from 2004 to 2013. We document that a BHC owning BOLI enjoys an average annual earnings increase of $12.5 million and an estimated annual tax shield of $3.4 million. This tax shield is nearly twice the size of average total CEO compensation. We provide empirical evidence that BOLI complements other forms of executive compensation. We empirically test potential agency costs associated with using BOLI as compensation but find no evidence of such costs. Further investigation shows that BHCs use BOLI to attract talented executives and benefit shareholders. We conclude that the significant benefits documented in this study provide convincing rationale for the increasing use of BOLI in recent years.

Keywords: Corporate governance; Executive compensation; Bank-owned life insurance; Bank holding company; Bank holding company performance (search for similar items in EconPapers)
JEL-codes: G21 G22 G34 (search for similar items in EconPapers)
Date: 2021
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DOI: 10.1007/s11156-020-00938-1

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