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Executive compensation, equity structure and risk-taking in Chinese banks

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Abstract

Executive compensation is an important part of the internal governance of commercial banks, and the rationality of the compensation mechanism directly affects the bank’s risk-taking. Based on the panel data of 34 listed small- and medium-sized banks in China from 2012 to 2020, this paper empirically examines the impact and mechanism between executive compensation and the risk-taking level of small- and medium-sized banks. We find that executives’ short-term executive compensation significantly and positively affects the risk-taking level of small- and medium-sized banks, while executives’ long-term executive compensation significantly and negatively affects the risk-taking. Furthermore, considering the specificity of the capital structure of small- and medium-sized banks, we analyse the moderating effect of the capital structure on the above roles and find that there is a partial moderating effect of the capital structure on the relationship between executive short-term compensation and risk-taking in small- and medium-sized banks. This study provides theoretical foundations and countermeasures for improving the executive compensation mechanism and optimising the equity structure to reduce the risk-taking of small- and medium-sized banks and maintain the stability of the financial system.

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Acknowledgement

Wenli Wang gratefully acknowledges the financial support from the General Project of the National Social Science Fund: Risk Prevention Mechanism and Policy Research of Small and Medium-sized Rural Banks of China under the New Development Pattern (21BGL170).

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Authors and Affiliations

  1. School of Economics and Management, Xi’an University of Technology, Xi’an, Shaanxi, China

    Wenli Wang & Liangjie He

  2. InnerMongolia University of Finance and Economics, Hohhot, China

    Jie Ma

  3. Shih Chien University at Kaohsiung, Kaohsiung, Taiwan

    Chun-Ping Chang

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  1. Wenli Wang
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Wang, W., He, L., Ma, J. et al. Executive compensation, equity structure and risk-taking in Chinese banks. Econ Change Restruct 57, 124 (2024). https://doi.org/10.1007/s10644-024-09701-1

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