Pay for prudence

• 成果类型: Article
• 署名作者: Arif, Salman; Donovan, John; Gopalan, Yadav; Morris, Arthur
• 署名单位: University of Minnesota System; University of Minnesota Twin Cities; University of Notre Dame; Indiana University System; IU Kelley School of Business; Indiana University Bloomington; Federal Reserve System - USA; Federal Reserve Bank - St. Louis; Hong Kong University of Science & Technology
• 刊物名称: JOURNAL OF ACCOUNTING & ECONOMICS
• ISSN/ISSBN: 0165-4101
• DOI: 10.1016/j.jacceco.2023.101619
• 发表日期: 2024
• 关键词: executive stock-options; managerial incentives; ceo compensation; RISK; firm; sensitivity; banks; debt; aggregation; INFORMATION

摘要

We provide the first evidence that prudential principles shape bankers' executive compensation, a phenomenon we call pay for prudence (PfP). We conjecture that PfP incentivizes bankers to balance shareholders' preference for risk with regulators' preference for prudence. Although PfP terms are often used in bank compensation contracts, we find that the use of detailed and concrete PfP terms are positively associated with equity incentives for risk-taking. Furthermore, detailed and concrete PfP terms are associated with lower tail risk, fewer bad loans, and lower likelihood of regulatory downgrades. While we do not find evidence that PfP is associated with lower profitability, PfP is associated with more diversified loan portfolios and reduced exposure to real estate. Our results shed light on a new dimension of bankers' pay and suggest that PfP-based incentives complement widely studied equity-based incentives for risk-taking by acting as guard rails that guide managers' pursuit of investment opportunities. (c) 2023 Elsevier B.V. All rights reserved.