CEO Compensation at Financial Firms

Amar Gande, Southern Methodist University
Swami Kalpathy, Southern Methodist University

Abstract

We use a novel dataset of emergency capital provided by the U.S. Federal Reserve to eighty-three large financial firms during 2007-2010 in response to the recent financial crisis. We use the Federal emergency capital assistance as an ex-post measure of excessive risk-taking prior to the crisis, and examine whether CEO risk-taking incentives promoted excessive risk-taking among large financial firms. We find strong evidence that both the amount as well as the likelihood of capital assistance are increasing in CEO risk-taking incentives. We also present evidence that CEO compensation contracts may have embedded in them incentives for CEOs to take on excessive risks. We argue that Federal financial assistance is a better signal of the extent to which a financial firm is distressed in the crisis period compared to traditional measures of firm performance used in prior studies and we provide direct evidence consistent with this interpretation.