Executive Compensation Restrictions: Do They Restrict Firms’ Willingness to Participate in TARP?


  • Brian Cadman,

  • Mary Ellen Carter,

  • Luann J. Lynch

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    • The authors are respectively from the David Eccles School of Business at the University of Utah, Carroll School of Management at Boston College, and Darden Graduate School of Business at the University of Virginia. They gratefully acknowledge the financial support of Boston College, the University of Utah, and the University of Virginia Darden School Foundation. The authors appreciate the research assistance of Ryan Kiracofe, Chris Liong, Christopher Rusyniak and Craig Tessiatore. They appreciate helpful comments and suggestions from an anonymous referee, Andrew Stark (editor), Bill Baber, Wenli Huang, Ryan Leece, Lei Li, Philip Strahan, Hassan Tehranian, and Pete Wilson, and from workshop participants at Boston University, Emory University, Georgetown University, London Business School, The Ohio State University, Yale University, University of Colorado at Boulder, University of Toronto Conference, the 2010 American Accounting Association annual meeting, and the 2011 American Accounting Association Management Accounting Section conference.

Mary Ellen Carter, Carroll School of Management, Boston College, 140 Commonwealth Avenue, Chestnut Hill, MA 02167, USA. e-mail: maryellen.carter@bc.edu


Abstract:  We examine the implications of regulatory intervention in pay-setting, by studying whether executive compensation restrictions associated with the Troubled Asset Relief Program (TARP) influence banks’ participation in the program. We find that banks more likely to be impacted by the restrictions are less likely to participate in TARP. Among banks accepting funds, we find that the likelihood of repaying before the end of 2009 is positively related to CEO incentive compensation. We find greater subsequent executive turnover and lower pay increases in banks accepting funds, consistent with concerns about talent drain. We also find that proxies for self-serving behavior are related to declining funds, suggesting pay preservation as a potential motive. Despite the motives behind declining funding, we find no evidence that the restrictions limited the objectives of TARP based on banks’ financial health or lending and may have allowed the government to allocate funds more effectively.