Three essays in banking: corporate governance and corporate finance

Vu, Tuyet Nhung (2020) Three essays in banking: corporate governance and corporate finance. PhD thesis, University of Glasgow.

Abstract

This thesis contains three empirical studies in banking: corporate governance and corporate finance. Specifically, I develop three independent yet related research questions to address the criticism over high Chief Executive Officers (CEOs) compensation, understand how executive compensation and financing decisions in the banking sector work under various exogenous shocks and whether banks manage to maintain their current favourable ratings through financing decisions.
The first empirical study (Chapter 3) examines the determinants and consequences of U.S. bank CEOs forgoing bonus during the 2007 - 2009 financial crisis. We find that CEOs are more likely to forgo bonus if their banks are larger and better governed, consistent with political cost and corporate information environment hypotheses. Subsequent to bonus forgoing, these CEOs total compensation are not negatively affected, they are less likely to depart, and their bank performance is not economically improved. The results shed light to the debate on CEO compensation and support compensation “shareholder value view”, suggesting that forgoing bonus is a temporary decision and has little economic impact on bank’s performance.
The second empirical chapter (Chapter 4) uses a unique dataset of mortgage origination at loan level in the bank holding companies (BHC) operating in the USA, this study examine how incentive mechanisms embedded in CEO cash bonuses influenced the origination of risky mortgages prior to the housing market collapse of 2008–2009. We find that banks were more likely to deny risky mortgages when CEOs’ cash bonus represented a higher proportion of total compensation. The findings are robust to exogenous shocks such as proximity to terrorist attacks and the adoption of FAS 123R. By identifying changes in cash bonus instigated by these shocks we show that banks located near the attacks preferred cash bonus over other forms of compensation, and that cash bonuses increased following the change of accounting policy. Taken together, these findings suggest that cash bonus mitigated the origination of risky mortgages, consistent with theories and empirical studies that predict that the incentive to take risks reduces when cash bonus forms a higher proportion of pay, and that levels of bank CEO cash bonus did not contribute to the 2008/9 financial crisis.
Finally, the third empirical study (Chapter 5) explores the impact of bank holding company (BHC) credit rating changes on the supply of local bank mortgage lending to address the question whether banks manage to maintain their current favourable ratings. We find evidence that BHC credit rating upgrades contribute to a tightening in the supply of mortgage credit in the markets served by the BHC’s bank(s). Additionally, the results show no association between credit rating downgrades and mortgage lending at the loan level, unless they heavily rely on non-core finance, in which case they deny more risky loan applications. Further, we also find that reductions in the supply of credit after a BHC rating upgrade are most pronounced for riskier loans and in markets with less competition. Recognizing potential market-based endogeneity, we examine the results for loans originated outside of the BHC’s state of domicile and find similar results. Finally, we do not find evidence that the banks held by upgraded BHCs are moving into other types of loans after the upgrade. Collectively, the results suggest that BHCs move to protect their improved rating after the upgrade at the expense of the supply of local credit.

• Item Type: Thesis (PhD)
• Qualification Level: Doctoral
• Keywords: CEO, forgo bonus, corporate governance, financial crisis, cash bonus, mortgage, bank risk-taking, terrorist attack, FAS 123R, credit ratings, bank lending, supply of credit.
• Subjects: H Social Sciences > HG Finance
• Colleges/Schools: College of Social Sciences > Adam Smith Business School > Accounting and Finance
• Supervisor's Name: Wu, Dr. Betty, Frank Liu, Professor Hong and Tsoukas, Professor Serafeim
• Date of Award: 2020
• Depositing User: Mrs. Tuyet Nhung Vu
• Unique ID: glathesis:2020-81590
• Copyright: Copyright of this thesis is held by the author.
• Date Deposited: 19 Aug 2020 09:16
• Last Modified: 07 Oct 2022 07:45
• Thesis DOI: 10.5525/gla.thesis.81590
• URI: https://theses.gla.ac.uk/id/eprint/81590