Executive Compensation in Imperfect Financial Markets

Executive Compensation in Imperfect Financial Markets

Elgar Financial Law series

Jay Cullen

This important book discusses the issue of executive compensation in Anglo-American financial markets following the financial crisis. The book begins by contextualizing the problem facing financial institutions in the US and the UK and argues that approaches to government and compensation reform are flawed. It then goes on to offer solutions and suggests that new reforms to executive compensation in financial institutions would be very welcome, despite certain limitations.

Chapter 5: The Global Financial Crisis and the complex relationship between asset prices, leverage and financial instability

Jay Cullen

Subjects: law - academic, company and insolvency law, corporate law and governance, finance and banking law


In the previous chapter, I attempted to explain why asset prices may become inflated and, arguably, divorced from fundamental value, often for protracted periods. This is, of course, concurrent with the predictions of the FIH, which holds that the lending policies of banks (the main sources of finance), shaped by memories of recent financial market performance, will create unsustainable levels of debt within an economy, and generate the potential for asset bubbles. Whilst this notion remains contentious amongst some neoclassical economists, it is clear that virtually every serious financial crisis in the modern era has been preceded by a bubble in one or more asset markets. Accordingly, these bubbles may be confined to particular sectors, or be diffused across the economy, as was the case in the lead-up to the most serious financial crisis since the Great Depression, the GFC. Whilst the focus of this book is on the propensity of stock market bubbles to affect executive compensation, it is clear that stock bubbles may themselves be propelled by asset price bubbles in other areas of the economy, which are transmitted to the stock market from other sectors. In keeping with the subject matter of this book, this chapter will consider the experience of Anglo-American financial markets which have, since only the turn of the twenty-first century, experienced several severe episodes of crisis.

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