Pay Me Later is Not Always Positively Associated with Bank Risk Reduction—From the Perspective of Long-Term Compensation and Black Box Effect

Tianyi Ma, Minghui Jiang and Xuchuan Yuan
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Tianyi Ma: School of Management, Harbin Institute of Technology, Harbin City 150000, China
Minghui Jiang: School of Management, Harbin Institute of Technology, Harbin City 150000, China
Xuchuan Yuan: School of Business, Singapore University of Social Sciences, Singapore 599494, Singapore

Sustainability, 2019, vol. 12, issue 1, 1-26

Abstract: The relationship between executive compensation and bank risk-taking is one of the core topics of corporate governance theory. Especially after the 2008 global financial crisis, due to the characteristics of banks, such as systemic risk, this relationship has become more important. However, though usually calculated on the basis of cash salary and inside equity, which can promote risk incentives, inside debt was considered a tool for risk reduction in prior empirical analyses. Based on actual bank situations, we had doubts about this relationship and wanted to verify the specific relationship between inside debt and risk. We initiated this research by setting up a theoretical model between inside debt and bank default risk and by simulating the result using data from Wells Fargo & Co. to draw the function image. We are the first to define the three kinds of compensation in three dimensions. Then, considering bankruptcy, we found the black box effect exists. Therefore, different from prior views, pay me later not only reduces but also increases risk. We expect our findings to offer help to the formulation of policies for pay contracts.

Keywords: bank default risk; inside debt; inside equity; long-term compensation model; annual model; time model; black box effect; BS model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

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