Shareholder wealth responses to European legislation on bank executive compensation

Abstract

This paper uses an event study approach to investigate the shareholder wealth responses to European legislation on bank executive compensation. Using a sample of 124 banks over 2009–2010 and over 20 legislative and related events, we find that in early stages bank shareholders react positively to broad discussion at the EU level on executive pay. When plans to regulate the pay process are considered, however, this results in a negative stockholder reaction. We also find that large bank shareholders are most affected by remuneration policy.

Keywords:

• remuneration regulation
• legislative procedure
• corporate governance
• European banks
• event study

JEL Classifications:

• G28
• G34

Notes

¹² The website of the European Commission Directorate General (DG) Internal Market and Services.

1. Published the 14 December 2010 and entry into force the 15 December 2010.

2. The Sarbanes-Oxley Act of 2002 was enacted following a series of failures involving various functions designed to protect the interests of the investing public.

3. Clause 49 requires, among other things, audit committees, a minimum number of independent directors, and CEO/CFO certification of financial statements and internal controls.

4. “Vorstandsvergütungsangemessenheitsgesetz” adopted in June 2009. As Hitz and Müller-Bloch (2015, (1) summarize, “the VorstAG mandates that compensation be (1) ‘customary’, (2) reflect management performance (pay for performance), and (3) be tied to long-term performance measures. In addition, the VorstAG includes an array of specific provisions on executive compensation, and the non-binding advisory vote of shareholders on board compensation (‘say on pay’). Also, it invokes liability for supervisory board members should they set inappropriate compensation.”

5. Shareholder voting on executive pay is commonly known as say-on-pay.

6. McWilliams and Siegel (1997) summarize event studies in the management literature, showing a different length for event windows (from –1, +1 to –90;+90) and Corrado (2011) reviews the event study methodology.

7. Other event windows were also analyzed but the conclusions reached remained the same and therefore they are not included in this paper, except when relevant in which case they are mentioned in the results section.

8. If variance of stock returns increases on the event date, the Patell test, using the time series of non-event period data to estimate the variance of the average abnormal returns rejects the null hypothesis too often.

9. The Proposal of the Directive had a significant and positive effect on market value for large and medium/small banks also for a shorter window around the event (–1, +1).

10. Indeed, different sample sizes have been used in event studies in the management literature (from 2 to 409) as shown by McWilliams and Siegel (1997).

11. Directive 2013/36/UE, Bylaw EU 575/2013, Delegated bylaw EU 604/2014.