Working Paper: CEPR ID: DP9674
Authors: Deniz Anginer; Asli Demirgüç-Kunt; Harry Huizinga; Kebin Ma
Abstract: This paper examines how corporate governance and executive compensation affect bank capitalization strategies for an international sample of banks over the 2003-2011 period. ?Good? corporate governance, which favors shareholder interests, is found to give rise to lower bank capitalization. Boards of intermediate size, separation of the CEO and chairman roles, and an absence of anti-takeover provisions, in particular, lead to low bank capitalization. However, executive options and stock wealth invested in the bank is associated with better capitalization except just before the crisis in 2006. In that year stock options wealth was associated with lower capitalization which suggests that potential gains from taking on more bank risk outweighed the prospect of additional loss. Banks? tendency to continue payouts to shareholders after experiencing negative income shocks are shown to reflect executive risk-taking incentives.
Keywords: bank capital; corporate governance; dividend payouts; executive compensation
JEL Codes: G21; M21
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Good corporate governance (G38) | Lower bank capitalization (G21) |
| Intermediate-sized boards (Y90) | Lower bank capitalization (G21) |
| Separation of CEO and chairman roles (G34) | Lower bank capitalization (G21) |
| Absence of antitakeover provisions (G34) | Lower bank capitalization (G21) |
| Executive compensation (stock options) (M52) | Higher bank capitalization (G28) |
| Overall CEO wealth (G39) | Higher bank capitalization (G28) |
| Good corporate governance (G38) | Board independence (G38) |
| Good corporate governance (G38) | Executive compensation (M12) |
| Board independence (G38) | Riskiness of bank capitalization strategies (G32) |
| Executive compensation (M12) | Riskiness of bank capitalization strategies (G32) |