Executive Compensation and Risk-Taking of Chinese Banks

We document a significantly positive relationship between executive compensation and risk-taking of Chinese listed banks over the 2007–2018 period. The finding is robust to the risk measures (Z-score, systematic risk and stock return volatility) used, the way to calculate executive compensation, and model specifications as well as estimation techniques. Further analysis suggests that bank past performance (captured by return on equity) strongly moderates the relationship between executive compensation and risk-taking. We also find a modest U-shaped association of bank Z-score with executive compensation. Our study appears to support the regulation on executive compensation for the sake of bank stability