Law Commons^™

Corporate Governance And Executive Compensation In Financial Firms: The Case For Convertible Equity-Based Pay, Jeffrey N. Gordon

Faculty Scholarship

Unlike the failure of a nonfinancial firm, the failure of a systemically important financial firm will reduce the value of a diversified shareholder portfolio because of economy-wide reductions in expected returns and a consequent increase in systematic risk. Thus, diversified shareholders of a financial firm generally internalize systemic risk, whereas managerial shareholders and blockholders do not. This means that the governance model drawn from nonfinancial firms will not fit financial firms. Regulations that limit risk-taking by financial firms can thus provide a benefit, rather than necessarily impose a cost, for the typical diversified public shareholder. Managerial shareholding also gives rise …