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!
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.
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