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Regulation and post-crisis pay disclosure strategies of banks

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Abstract

The purpose of this paper is to examine how banks changed their executive pay disclosure practices in the aftermath of the global financial crisis. In particular, we examine banks’ response to regulations meant to curb banks’ short-term risk-taking incentives. We document that differences in the compliance strategies among banks are function of bank’s ownership structure and board governance. Using a unique hand-collected dataset, we find that foreign-controlled banks disclose significantly more on executive compensation than do nonforeign-controlled banks. Also, banks with high pension fund ownership adopt a higher level of disclosures. Foreign-controlled banks undertake more voluntary disclosure on executive compensation than do nonforeign-controlled banks. We go further and we test the moderating effect of board compensation committee meetings on the relationship between bank ownership and disclosure. We document that more frequent meetings of the compensation committee increase the executive pay disclosure. We find that the incremental effect of more frequent compensation committee meetings on disclosure is lower for foreign-controlled and for banks with a higher ownership of pension funds. These results may suggest that the board compensation committee matters less for foreign-controlled banks as they are already committed to disclose.

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Notes

  1. Several studies document evidence that banks with foreign shareholders hold themselves accountable to a wider group of stakeholders (Attig et al. 2016; Symeou et al. 2018). The foreign-controlled firms need to respond to institutional pressure from external international stakeholders, as well as the challenges stemming from the “liabilities of foreignness” (Boubakri et al. 2016).

  2. In this paper state-controlled banks are those in which the domestic government has controlling ownership in the bank. These banks cannot be foreign-controlled banks. However, there could be prominent private shareholders such as pension funds.

  3. The regulation also mandates constituting a compensation committee (if the bank does not already have one).

  4. For example, the compensation committee prepares a detailed report on executive pay practices to be approved by the board and submitted for shareholders’ vote at the annual general meetings.

  5. Our argument follows from a substitute relationship between two governance mechanisms: (1) ownership structure and (2) governance activity of the board (see, for example, Jensen 1993; Adams and Funk 2012; Klein 2002). In banks in which the ownership mechanism is strong (i.e., they are foreign-controlled banks or they have a large pension funds ownership), the incremental effect of the monitoring activity of the board compensation committee (measured by the number of compensation committee meetings) will be lower.

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Acknowledgements

For helpful comments we thank Iftekhar Hasan, Oliviero Roggi, Amine Tarazi, and other participants of International Risk Management Conference (IRMC), October 1-3, 2021 in Cagliari (Italy), as well as Brian Lucey, Michael Goldstein and the participants of International Finance, Sustainable Finance and Growth, June 12-14 in Naples (Italy).

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Authors and Affiliations

  1. Department of Economics and Management, University of Florence (ITA), Via delle Pandette 9, 50127, Florence, Italy

    Sara De Masi

  2. Department of Finance, New York University, Leonard N. Stern School of Business (US), 44 West Fourth Street, New York, NY, 10012, USA

    Kose John

  3. Department of International Comparative Studies, Warsaw School of Economics (PL), al. Niepodległosci 162, 02-554, Warsaw, Poland

    Agnieszka Słomka-Gołębiowska

  4. Department of Institutional Economics, University of Lodz (PL), 41 Rewolucji 1905 St., 90-255, Lodz, Poland

    Piotr Urbanek

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  1. Sara De Masi
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Table 12 Variable descriptions
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Table 13 Pearson correlation
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De Masi, S., John, K., Słomka-Gołębiowska, A. et al. Regulation and post-crisis pay disclosure strategies of banks. Rev Quant Finan Acc 61, 1243–1275 (2023). https://doi.org/10.1007/s11156-023-01177-w

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