Paper Spotlight: How are Bankers Paid?

Benjamin Bennett

Radhakrishnan Gopalan

Anjan Thakor







There is widespread recognition among policymakers and regulators that bank behavior, especially risk-taking, is influenced by the type of compensation paid to bank executives. Academic literature, however, is still grappling with this question, and it is not unfair to say that there is a dearth of evidence even about basic facts about how executive compensation has changed after the 2008 financial crisis as new rules were introduced.  There is also lack of clarity about the relationship between bank executives’ compensation and performance, given the nature of banking. In the paper titled “How are Bankers Paid?” Benjamin Bennett, Radha Gopalan, and Anjan Thakor use comprehensive data to investigate the structure and evolution of bank compensation from 2006 through 2018. This is a very useful exercise to start establishing basic facts. Benjamin, Radha, and Anjan find a string of important results, which can be seen as different dimensions of the same question. First, the average bank CEO is paid less than the non-bank peer, but this effect is largely driven by the compensation of small bank CEOs, highlighting the relationship between size and compensation that can explain the attention grabbing articles in the popular press. Second, while bank CEO compensation declined during the crisis, it rapidly recovered and is now almost 25% higher than pre-crisis levels. Third, bank characteristics matter: besides size, banks with less non-performing loans, and with business models involving higher non-interest income and higher wholesale funding, pay their CEOs more. Fourth, bank compensation is sensitive to ROA and ROE but not to stock returns. Last, greater dependence of bank CEO compensation on short-term measures of bank performance is associated with higher tail risk. In an age of low rates and reaching for yield, these results can help frame better the one important issue in the debate on how to regulate bank’s risk-taking behavior.

Spotlight by Andrew Ellul
Photos courtesy of Benjamin Bennett, Radhakrishnan Gopalan, and Anjan Thakor

Paper Spotlight: Hard Marriage with Heavy Burdens: Organized Labor as Takeover Deterrents

Xuan Tian

Wenyu Wang 

Differences in their objective functions lead to possible conflicts of interests between various stakeholders of firms; e.g., between shareholders and employees. These conflicts are more likely to manifest when firms face important investment or governance decisions, specifically, at times of mergers and acquisitions. How does the power of a firm’s labor force affect its exposure and gains in takeovers? In a forthcoming RCFS paper, “Hard Marriage with Heavy Burdens: Organized Labor as Takeover Deterrents,” Xuan Tian and Wenyu Wang study this question using a clever research design. They use the “locally” exogenous variation in labor power created by close-call union elections in a regression discontinuity design. Authors find causal adverse effects of increased labor power on target firms’ takeover exposure, with reductions in target offer premium and announcement returns and longer deal completion times. Authors also explore plausible underlying mechanisms and show that these results are stronger for more powerful and conflict-provoking unions, where the opinions of the target and the acquirer labor forces are more likely to be in conflict. Interestingly, though, the authors also find that the total value created in these takeovers of stronger, unionized labor force is not lower in terms of combined firm announcement returns, post-merger profitability, and long-term market valuation. It is because bidders of unionized targets are more experienced, tougher negotiators that face fewer union threats themselves. Overall, this paper provides new and important insights into the real effects of employee power in the market for corporate control.

Spotlight by Isil Erel
Photos courtesy of Xuan Tian and Wenyu Wang

Paper Spotlight: Institutional Investors and Hedge Fund Activism

Xianjue Wang

Laura Starks

Simi Kedia

The relationship between hedge fund activists and institutional shareholders in firms targeted by activists could be fraught with conflicting interests, making it a very important question to explore. In the paper “Institutional Investors and Hedge Fund Activism,” Simi Kedia, Laura Starks, and Xianjue Wang study how differences among institutional investors impact their willingness to support hedge fund activists, the impact on the campaign’s success, and potential value created from hedge fund activism. Simi, Laura, and Xianjue find that “activism-friendly institutional ownership” is associated with a much greater likelihood, than other types of institutional ownership, with the propensity of a firm being targeted. This result is suggestive of an assortative match between hedge fund activists and the firm’s ownership base. The paper also finds that pre-event activism-friendly ownership is associated with significantly higher long-term stock returns and operating performance of the target firm. These results help us understand how a firm’s ownership, specifically the type of institution, matters for the success of failure of campaigns. They are consistent with a role for the activism-friendly institutions in creating the right environment for hedge fund activists to push for changes in firm decisions and the subsequent impact on firm value.

Spotlight by Andrew Ellul
Photos courtesy of Simi Kedia, Laura Starks, and Xianjue Wang
First published September 17, 2020