Optimize the Banker’s Multi-Stage Decision-Making and the Mechanism of Pay Contract Influencing on Bank Default Risk in the Long-Term Model

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

Sustainability, 2020, vol. 12, issue 4, 1-22

Abstract: In recent years, researchers have been devoted to illustrating the correlation between bankers’ pay contracts and a bank’s risk-taking behavior where corporate governance is concerned, especially throughout the past four decades and by using empirical analysis. Despite being a widespread concern, the causality of this relationship is not thoroughly understood. We initiate this research by modeling bankers’ multi-stage decisions of option investment and bond investment from the perspective of theoretical analysis, and by analyzing the function image results using data from Wells Fargo & Co. from the ExecuComp, BvD Orbis, and CRSP-COMPUSTAT databases. We aim to deeply explore the mechanism of how compensation influencing on risk. We are the first to find that it has a “risk cap”, which is the optimal risk level to maximize the return of decision-making. We are also the first to discover the optimal decision coefficient level to maximize the decision return, during which the internal causes and mechanisms of the impact of bankers’ compensation on a bank’s default risk are revealed. We also illustrate the influence of the number of periods. We expect our findings to provide advice for establishing policies when designing pay contracts.

Keywords: decision-making; multi-stage; pay contract; bank default risk; option investment; bond investment; long-term model; BS model (search for similar items in EconPapers)
JEL-codes: O13 Q Q0 Q2 Q3 Q5 Q56 (search for similar items in EconPapers)
Date: 2020
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