{"title":"Optimal design of deferred compensation for bank executives under agency conflicts","authors":"Liu Gan, Mingyu Xu, Yingxian Tan, Linyue Chen","doi":"10.1111/irfi.12477","DOIUrl":null,"url":null,"abstract":"<p>We analyze the optimal design of deferred compensation for bank executives under agency conflicts in a continuous time model with a bank liability structure. Our model demonstrates that a well-designed deferred compensation contract can effectively mitigate bank executives' asset substitution problem and significantly enhance the total value of the bank, which aligns with existing empirical studies. Moreover, we find that the motivation for bank executives to shift risk under deferred compensation is diminished when supervision is more stringent, the bank has greater market power, or the write-down ratio of debt is lower.</p>","PeriodicalId":46664,"journal":{"name":"International Review of Finance","volume":"24 4","pages":"772-792"},"PeriodicalIF":1.8000,"publicationDate":"2024-11-17","publicationTypes":"Journal Article","fieldsOfStudy":null,"isOpenAccess":false,"openAccessPdf":"","citationCount":"0","resultStr":null,"platform":"Semanticscholar","paperid":null,"PeriodicalName":"International Review of Finance","FirstCategoryId":"96","ListUrlMain":"https://onlinelibrary.wiley.com/doi/10.1111/irfi.12477","RegionNum":4,"RegionCategory":"经济学","ArticlePicture":[],"TitleCN":null,"AbstractTextCN":null,"PMCID":null,"EPubDate":"","PubModel":"","JCR":"Q2","JCRName":"BUSINESS, FINANCE","Score":null,"Total":0}
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Abstract
We analyze the optimal design of deferred compensation for bank executives under agency conflicts in a continuous time model with a bank liability structure. Our model demonstrates that a well-designed deferred compensation contract can effectively mitigate bank executives' asset substitution problem and significantly enhance the total value of the bank, which aligns with existing empirical studies. Moreover, we find that the motivation for bank executives to shift risk under deferred compensation is diminished when supervision is more stringent, the bank has greater market power, or the write-down ratio of debt is lower.
期刊介绍：
The International Review of Finance (IRF) publishes high-quality research on all aspects of financial economics, including traditional areas such as asset pricing, corporate finance, market microstructure, financial intermediation and regulation, financial econometrics, financial engineering and risk management, as well as new areas such as markets and institutions of emerging market economies, especially those in the Asia-Pacific region. In addition, the Letters Section in IRF is a premium outlet of letter-length research in all fields of finance. The length of the articles in the Letters Section is limited to a maximum of eight journal pages.
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