VGSF faculty members receive the WU Best Paper Award 2018

Chris­tian Laux, Gyöngyi Lor­anth and Ju­lian Kolm re­ceived the WU Best Pa­per Award 2018 with the pa­per Bank Reg­u­la­tion, CEO Com­pens­a­tion, and Boards. The pa­per is pub­lished in the Re­view of FIn­ance, Volume 21, Is­sue 5, 1 August 2017, Pages 1901–1932.

Con­grat­u­la­tions for their achieve­ment!

Pa­per

Bank Reg­u­la­tion, CEO Com­pens­a­tion, and Boards

We ana­lyze the lim­its of reg­u­lat­ing bank CEO com­pens­a­tion to re­duce risk shift­ing in the pres­ence of an act­ive board that re­tains the right to ap­prove new in­vest­ment strategies. Com­pens­a­tion reg­u­la­tion pre­vents over­in­vest­ment in strategies that in­crease risk, but it is inef­fect­ive in pre­vent­ing un­der­in­vest­ment in strategies that re­duce risk. The reg­u­lator op­tim­ally com­bines com­pens­a­tion and cap­ital reg­u­la­tions. In con­trast, if the board deleg­ates the choice of strategy to the CEO, com­pens­a­tion reg­u­la­tion is suf­fi­cient to pre­vent both types of risk shift­ing. Com­pens­a­tion reg­u­la­tion in­creases share­hold­ers’ in­cent­ives to im­ple­ment an act­ive board, which re­duces the ef­fect­ive­ness of com­pens­a­tion reg­u­la­tion.