The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commerci
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The agency problem revisited: a structural analysis of managerial productivity and CEO compensation in large US commercial banks Shasha Liu1 · Robin Sickles2 Received: 11 February 2020 / Accepted: 31 October 2020 © Springer-Verlag GmbH Germany, part of Springer Nature 2020
Abstract The paper analyzes performance, incentives, and the inefficiencies that may arise due to agency problems and market power using a newly developed panel of large US commercial banks that have too-big-to-fail nature. We use a structural model to characterize managerial efficiency, which complements technical efficiency in standard stochastic frontier models. We incorporate managerial decisions, bank-specific characteristics, and market competition in deriving managerial efficiency. Data on the 50 largest commercial banks in the USA during 2000 and 2017 are collected from the Call Reports and are matched with CEO compensation from S&P’s ExecuComp database. The paper connects empirical evidence with economic theory and contributes to the literature on efficiency and management. The ultimate goal is to better understand the linkages among managerial performance, CEO compensation, and the size and scope of bank operations. Current results point to robust empirical findings. Economies of scale have steadily declined throughout the period and are not positively related to managerial performance and CEO compensation. The size of a bank does not seem to be justified by the evidence in that larger banks offer larger bonuses and tend to have lower managerial efficiency and diminishing scale economies. Keywords Banking · Panel data · Stochastic frontier · Sources of efficiency · Managerial compensation JEL Classification C13 · C33 · D22 · G21
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Robin Sickles [email protected]
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Freddie Mac, 1551 Park Run Dr, McLean, VA 22102, USA
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Rice University, 6100 Main Street, Houston, TX 77005, USA
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S. Liu, R. Sickles
1 Introduction The banking industry has experienced major regulation changes in the last three decades. A period of banking deregulation removed restrictions on branching across states under the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994. Later, the Federal Reserve Board allowed commercial banks to underwrite insurance and securities through affiliates under the Financial Modernization Act (also known as Gramm–Leach–Bliley Act) of 1999. The number of banks declined by more than 50% after two decades of deregulation. Along with technological developments and financial innovations, banks have become much larger and provide more complex profiles of financial services. One direct consequence of banking deregulation has been financial consolidations which result in larger banks and more integrated banking system. Based on the Federal Reserve Statistics in (2017), asset shares1 of the four largest banks in the USA, each with over $1 trillion in consolidated assets by 2017, has increased from 23% in 2000 to 45% in 2017, as shown in Fig. 1. The asset share almost doubled during the period. The top 50 banks, each wit
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