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Congress has directed federal regulators to oversee banker pay. For the first time, these regulators are now scrutinizing the incentives of risk-takers beyond the bank's top executives. Like most public company managers, these bankers are increasingly paid in stock rather than cash. The ostensible reason is that stock-based pay aligns manager and shareholder interests. But portfolio theory predicts that managers will diversify away, or "unload," stock-based pay unless they are restricted from doing so. One way to deter unloading may be to require managers to disclose it, as investors and colleagues will assume that managers are unloading because they are unmotivated or think their stock is overvalued.

Using rare data on stock unloading at Goldman Sachs, this Essay provides the first empirical study of incentives throughout a bank's managerial hierarchy. I find that bankers paid in stock soon sell a nearly equivalent amount, unless they have to disclose, in which case they sell much less. These findings suggest that regulators concerned about incentives need information on bankers' overall equity holdings, including the effects of unloading. They also suggest that pre-crisis disclosure rules encourage executives to maintain dangerously concentrated positions in their bank's stock.


Banking and Finance Law | Law | Law and Economics