The Relationship between Corporate Compensation Policies and Investment Opportunities: Empirical Evidence for Large Bank Holding Companies

David W. Blackwell · Joseph F. Sinkey

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Corporate Finance and Governance Auditing, Earnings Management, Governance Accounting and Organizational Management

Abstract

This paper investigates whether the firm's set of investment opportunities drives the amount and type of executive compensation by conducting a detailed empirical analysis of the executive compensation plans of large bank holding companies. We examine intra-industry changes in compensation policy over a period of significant change in the investment-opportunity set, 1979 to 1985. Our empirical findings reveal that total real compensation and the ratio of incentive compensation-to-total compensation increased substantially at regional bank holding companies but remained stable at money-center bank holding companies. These results are consistent with the hypothesis that during the early 1980s financial innovation and deregulation created greater growth opportunities for regional bank holding companies than for money-center bank holding companies.

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1973The Pricing of Options and Corporate Liabilities 1992The investment opportunity set and corporate financing, dividend, and compensation policies 1993Risk Management: Coordinating Corporate Investment and Financing Policies 1993Additional evidence on the association between the investment opportunity set and corporate financing, dividend, and compensation policies 1989Free Cash Flow and Stockholder Gains in Going Private Transactions 1987An Analysis of the use of Accounting and Market Measures of Performance in Executive Compensation Contracts 1995Compensation Policy and the Investment Opportunity Set 1983Commercial Bank Financial Management

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