Banks v. Industrials: Executive Compensation, Securitization, and the Financial Crisis

Abstract

We assess the effect that asset securitization has on executive compensation among banks and non-bank (“industrial”) firms. Securitization is the process whereby firms “sell” financial assets in transactions that bear many characteristics of a loan. Scholars and policy makers have expressed concern about the agency costs associated with such transactions because they inject liquidity that managers may be tempted to capture through excessive compensation. Using a set of over 20,000 firm-year observations, we compare the effect that securitization has on CEO compensation at roughly 2,500 unique firms. We find that banks that securitize pay their executives more than banks that do not, and this difference is both statistically and economically significant. Interestingly, we find no meaningful difference when comparing the compensation practices of industrial firms that do and do not securitize. We attribute the difference between banks and industrials on these measures to special regulatory and informational attributes of banks. Our findings advance understandings of the causes of the credit crisis, and have implications for ongoing debates about the scope and nature of efforts to reform both securitization and executive compensation.