Abu Jalal

Bank Executive Compensation Structure, Risk Taking and the Financial Crisis

This paper investigates (1) how the composition of executive compensation is related to a bank’s incentive to take excessive risk, (2) whether executive compensation in larger banks, especially the too-big-to-fail (TBTF) banks, induces more severe moral hazard behavior, and (3) how the relation between bank executive compensation and risk taking changes before and during the recent financial crisis. We find that bank risk measured by the Z-score and the volatility of stock returns increases with both the percentages of short-term and long-term incentive compensation. However, greater proportion of incentive pay decreases the likelihood for a bank to become a problem or failed institution. This result holds for the periods before and during the recent financial crisis. The distress-mitigating effects of incentive compensation are further confirmed by our finding that both the proportions of bonus and long-term incentives are positively related to bank valuation and performance. Interestingly, we find that TBTF banks experience greater risk taking (lower Z-score) and are more likely to be in financial distress than smaller banks. However, greater incentive compensation in TBTF banks helps reduce their insolvency risk relative to smaller institutions.

Does Religion Affect Capital Structure

We hypothesize that if the cultural characteristics of a region are important, then firms located in Protestant- and Catholic-majority counties within the U.S. will have different attitude toward leverage. We find that a 1% increase in a countys Protestant religiosity leads to a 0.4% lower leverage and less frequent debt issuances. This religiosity also has significant effect on the firms’ adjustment speeds toward the target capital structure. Using a sample of international firms, we find that these differences in leverage in the U.S. are similar to the behavior of firms in Catholic and Protestant countries outside of the U.S.

The Effects of Corruption on Capital Structure: When Does it Matter?

We study the effects of corruption on the capital structures of firms in 72 countries. Using the Corruption Perception Index, we show that corruption increases the costs of debt and equity. Interestingly, as the level of corruption decreases, these costs become more sensitive to changes in corruption. Similarly, the capital structure adjustment speeds exhibit a non-linear dynamic. These results indicate that for the most corrupt countries, it is necessary to engage in corruption reduction efforts to get past a minimum threshold before they can affect the behaviors of firms. Additionally, the least corrupt countries need to remain vigilant against increases in corruption.

The Pecking Order and Marginal Debt Issuance: An International Perspective

This paper studies the marginal debt issuance behavior of publicly traded companies using firm-level data from 42 countries. The implications of the strict version of the pecking order theory regarding marginal debt financing are rejected in the international data overall. However, and more importantly, we might expect reliance on marginal debt issuance to be higher in markets with less transparent financial systems since in those countries information asymmetry and adverse selection would be expected to be more of a problem. Using the framework of Shyam-Sunder and Myers (1999), that is what is found. This provides empirical support for the underlying assumptions of the pecking order theory regarding information asymmetry and dependence on debt financing. I also find empirical evidence that firms from developing countries are successful in their attempt to reduce this information asymmetry problem by exchange listing ADRs, as indicated by the Shyam-Sunder and Myers (1999) metric.