Inside debt and shadow banking

Kebin Deng, Wenxia Ge and Jing He

Journal of Corporate Finance, 2021, vol. 69, issue C

Abstract: This study examines the effect of inside debt arising from CEO compensation deferral policies on shadow banking. We construct a parsimonious model that shows that increased bank inside debt leads to increased shadow banking. Using a CEO compensation deferral policy imposed on the Chinese banking industry in 2010, we empirically test our theoretical prediction on the effect of inside debt on shadow banking proxied by non-principal-guaranteed wealth management products. We find that banks that adopt the CEO compensation deferral policy exhibit higher levels of shadow banking than their counterparts and that this result is not contingent on bank size or the extent of government control. Moreover, the effect of inside debt on shadow banking is stronger in banks with higher loan-to-deposit and non-performing-loan ratios and in banks with CEO turnover, suggesting that the compensation deferral policy induces CEOs, especially newly appointed CEOs, to do more shadow banking to circumvent regulations regarding the balance-sheet risk and to boost performance.

Keywords: CEO turnover; Compensation deferral; Inside debt; Off-balance-sheet risk; Shadow banking (search for similar items in EconPapers)
JEL-codes: G21 G28 K20 (search for similar items in EconPapers)
Date: 2021
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:corfin:v:69:y:2021:i:c:s0929119921001607

DOI: 10.1016/j.jcorpfin.2021.102038

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