۱- Introduction

۲- Background and hypotheses development

۳- Research design

۴- Empirical results

۵- Conclusion

References

Abstract

This study examines the effect of compensation restrictions introduced by the Troubled Assets Relief Program (TARP) of 2008 on the performance of banks and their compensation structures. It documents significant performance improvement among TARP banks that experienced Chief Executive Officer (CEO) resignations after their banks accepted TARP funds. The improvement is most significant in the year following CEO resignation. In addition, TARP banks that kept their CEOs show a significant increase in CEO pensions post-TARP. TARP banks that did not experience CEO resignations, thus, appear to substitute pension increases for their CEOs to mitigate the TARP-induced decrease in conventional forms of compensation. Further analysis on all banks without CEO resignations shows that TARP banks have significantly higher increase in pension benefits post 2009 than banks that chose to decline TARP funds. The evidence shows that increased pension arrangements play a significant role in CEOs’ decisions to remain in their roles despite the constraints imposed by TARP.

Introduction

In response to the economic crisis in 2008, the US Treasury implemented the Troubled Asset Relief Program (TARP) to strengthen the financial system by purchasing troubled assets from financial institutions. One of the controversial aspects of the program is the restrictions it placed on executive compensation and actions deemed to impose excessive risks on the banks. Empirically, many studies show that some banks rejected TARP or exited TARP early due to the restrictions on the chief executive officer (CEO) compensation (e.g., Bayazitova and Shivdasani, 2012). Cadman et al. (2012) and Cazier (2014) find greater subsequent executive departures in banks that accepted TARP funds, and show that the departures were primarily voluntary. Based on Cadman et al. (2012), 81% of the executives who resigned moved to non-TARP banks. Kim (2010) reports a negative market reaction to the announcement of compensation restrictions for banks that accepted TARP. The adverse market reaction points to possible negative effect of the TARP on the long-run value of the banks. However, it is not clear whether resignations of some of the bank CEOs influenced the subsequent performance of their banks. Moreover, many of the bank CEOs did not resign despite the effect of TARP on their compensation; and, it is not clear why they chose to stay. A key question that emerges from the preceding discussion is whether TARP banks whose CEOs resigned at the outset of the program experienced subsequent improvement or deterioration in performance.