Bankers on the Board and CEO Incentives

Authors


  • The first author, Min Jung Kang is Assistant Professor of Finance at the University of Michigan-Flint. Part of this paper comes from the first chapter of her doctoral dissertation at Michigan State University. Andy Kim is an Associate Professor of Finance at SungKyunKwan University. Special thanks are due to G. Geoffrey Booth and Jun- Koo Kang, who gave the authors great support and encouragement. The authors also thank John Doukas and two anonymous referees for great comments to help improve the quality of the paper. They also thank the seminar participants at the SKKU–Peking University Forum; the Korean Securities Association seminar; California State University, San Bernardino; Hofstra University; Korea University; Menlo College; Michigan State University; Seoul National University; SKKU; and the University of Michigan-Flint. For insightful comments, the authors thank Joon Chae, Sungwook Cho, Henrik Cronqvist, Mara Faccio, C. Edward Fee, Gustavo Grullon, Charles J. Hadlock, Jarrad Harford, Gerard Hoberg, Cliff Holderness, Mark Huson, Dirk Jenter, Li Jin, Dong-Soon Kim, Joong Hyuk Kim, Jungwook Kim, Noolee Kim, Woo Chan Kim, Woojin Kim, Ron Masulis, Michael Mazzeo, William L. Megginson, Hyun Seung Na, Kwang Woo Park, Sheridan Titman, Fei Xie and JunYang, and Dirk Jenter for graciously sharing the CEO turnover data for 1993–2001. The authors also appreciate Moody's KMV for providing the expected default frequency data for our sample firms. Andy Kim is grateful to the Sungkyun Research Fund, Sungkyunkwan University, 2015, and the excellent research assistance of Youngjae Jay Choi, Brian He, Denise Heng, Joyce Tan and Alvin Wei. All errors are those of the authors.

ABSTRACT

The Sarbanes-Oxley Act demanded the presence of more financial experts on corporate boards to improve governance. Directors from lending banks require particular attention because of the conflicts of interest between shareholders and debtholders despite their financial expertise. In this paper, we examine whether commercial banker directors work in the best interests of shareholders in providing incentives to the CEO. We find that the CEO's compensation VEGA is lower if an affiliated banker director is on the board. Further, we find that commercial banker directors increase debt-like compensation (Sundaram and Yermack, 2007) and make it less sensitive to risk.

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