Working Paper: NBER ID: w4704
Authors: R. Glenn Hubbard; Darius Palia
Abstract: This paper examines an effect of deregulating the market for corporate control on CEO compensation in the banking industry. Given that each state's banking regulation defines the competitiveness of its corporate control market, we examine the effect of a state's interstate banking regulation on the level and structure of bank CEO compensation. Using panel data on 147 banks over the decade of the 1980s, we find evidence supporting the hypothesis that competitive corporate control markets (i.e., where interstate banking is permitted) require talented managers whose levels of compensation are higher. We also find that the compensation-performance relationship is stronger than for managers in markets where interstate banking is not permitted. Further, CEO turnover increases substantially after deregulation, as does the proportion in performance-related compensation. These results suggest strong evidence of a managerial talent market -- that is, one which matches the level and structure of compensation with the competitiveness of the banking environment.
Keywords: CEO compensation; deregulation; banking; performance; managerial talent
JEL Codes: G34; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| deregulation of interstate banking (G28) | increase in CEO compensation levels (M12) |
| increase in CEO compensation levels (M12) | stronger compensation-performance relationship (M52) |
| deregulation of interstate banking (G28) | stronger compensation-performance relationship (M52) |
| deregulation of interstate banking (G28) | increase in CEO turnover (M12) |
| increase in CEO turnover (M12) | disciplining mechanism for managers (M54) |
| deregulation of interstate banking (G28) | higher compensation due to managerial talent hypothesis (M52) |
| competitive corporate control markets (G34) | require talented managers (M54) |