Investment Bank Governance

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Abstract
Employing a new method of industry tests we examine investment bank governance. Most of the findings reject the view that banks are governed suboptimally over a sample period from 1990 through 2003. CEO pay is large and significantly sensitive to stock price performance, and stock price performance often outperforms the market. Results are consistent with bank directors being reputable, independent, and in control of their committees. Bank management is disciplined by pressure from a number of competitive product markets and from a vigorous market for bank control. No evidence exists that unusual governance qualities that could be unique to investment banking are indications of poor governance performance. The evidence agrees with the view that investment banks choose optimal governance.