Does inside debt alleviate banks' risk taking? Evidence from a quasi-natural experiment in the Chinese banking industry |
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| Institution: | 1. School of Economics and Commerce, South China University of Technology, Guangzhou, China;2. Shool of Finance, Zhejiang Gongshang University, Hangzhou, China;3. School of Finance, Zhongnan University of Law and Economics, Wuhan, China;4. School of Business and Management, Shanghai International Studies University, Shanghai, China;1. School of Economics, Huazhong University of Science and Technology, Luoyu Road 1037#, Wuhan, 430074, Hubei, China;2. School of Finance, Zhongnan University of Economics and Law, 182# Nanhu Avenue, Wuhan 430073, Hubei, China;1. Department of Accounting, School of Management, Center for Management Accounting Research, Jinan University, No. 601 Huangpu Road West, Guangzhou 510632, China;2. Center for Accounting, Finance and Institutions, Business School, Sun Yat-sen University, No. 135, West Xingang Road, Guangzhou 510275, China;3. Department of Accounting, C.T. Bauer College of Business, University of Houston, USA;4. Department of Finance, Lingnan (University) College, Sun Yat-sen University, No. 135, West Xingang Road, Guangzhou 510275, China |
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| Abstract: | This paper investigates the causal effects of inside debt on banks' risk-taking behavior by using a quasi-natural experiment of compensation deferring policy in the Chinese banking industry. We find that the policy reduces banks' risk-taking by approximately 16.25%. Banks with high levels of government control significantly reduced their risk-taking after the compensation deferring policy was enacted, while those with low levels did not have the same response. By showing that CEOs' compensation deferring significantly reduces banks' risk-taking in an emerging market, we offer direct evidence for the academic understanding of the governance role of inside debt in emerging markets with weak country-level investor protection. Our results provide timely empirical evidence for government regulators who are concerned about the costs and benefits of banks' risk shifting or the risk of the financial system. |
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