The Economic Consequences Of Bank Executives' Deferred Compensation ——Based On Perspectives Of Risk And Efficiency

The analysis framework of agency theory emphasizes the importance of equity-based and debt-based incentive in alleviating shareholder-management and creditor-management agency issues.However,both the theoretical and practical circles have paid too much attention to equity-based incentive and there is relatively fewer research on debt-based incentive.As a result,the shortcomings of the equity-based incentive exposed at a painful price in the financial crisis in 2008.In order to protect the interests of creditors and strengthen the prevention of financial risks,the Financial Stability Board(FSB)issued documents to guide commercial banks to implement executives'deferred compensation,a debt-based incentive measure.In response to the FSB's call,the(former)CBRC of China also issued related policies.However,as an international universal bank risk prevention measure rooted in the western theories and practices,can executives' deferred compensation be successfully implanted in Chinese society?This is not only critical to the prosperity and stability of the financial industry in China,but also affects the financial landscape of the world in today's financial globalization.Compared with the banking industry in western countries,the banking industry in China has the following characteristics:first,the state-owned banks account for a relatively high proportion;second,the shadow banking is not in parallel with the commercial banks but attached to commercial banking system;third,the shareholding ratio of bank executives is relatively low.The institutional background differences underscores the need for localization research on the economic consequences of bank executives' deferred compensation.What's more,most papers both in home and aboard pay their attention to whether bank executives' deferred compensation can reduce bank risk,little explores how to reduce,reduce which type of risk and does it produce other economic consequences beside risk.Based on the three charactristics in China's banking industry mentioned above,this paper makes further studies on the economic consequences of executives' deferred compensation from the perspective of risk and efficiency.Specifically,this paper examines three sub-questions.First,when the compensation of bank executives is deferred,whether and how do banks reduce risk through accounting methods?Second,will bank executives' deferred compensation reduce shadow banking which hidden huge risks?Third,efficiency goes hand in hand with risk,will executives' deferred compensation affect bank efficiency while reducing bank risk?Taking the large state-owned banks,joint-stock banks,city commercial banks,and listed rural commercial bank in 2007-2018 as the sample,and using the difference-in-difference method,it is found that:First,the executives'deferred compensation can significantly improves the timeliness of loan loss provisions.However,this conclusion only applies to state-owned banks and listed banks.On the contrary,the executives' deferred compensation in non-state-owned banks is harmful to improving the timeliness of loan loss provision.It is further found that,the executives' deferred compensation suppressed the bank loan procyclicality by increasing the timeliness of loan loss provision,indicating that the executives'deferred compensation not only urges banks to strengthen risk prevention,but also reduces bank risks effectively.Second,this paper shows that,after the implementation of the executives' deferred compensation,the shadow banking,which contains huge risks,has not been restricted,on the contrary,it has been increasing.This result indicates that,at least on the aspect of shadow banking,the executives' deferred compensation has produced the "cobra effect" which is contrary to supervisors'expectations.After the compensation is deferred,the bank"pretend to advance along one path while secretly going along another",although banks reduces high-risk real estate loans superficially,but the more loans a bank reduces,the larger the shadow banking it engages in.Further research shows that the listing of banks and external audits can help reduce the impact of executives'deferred compensation on shadow banking.Lastly,bank executives' deferred compensation which aims to reducing risk primarily has also reduced the bank's efficiency in the meanwhile.The mechanism test shows that "the high-risk and high-return hypothesis" can better explain the negative effect of deferred compensation on bank efficiency.Further research finds that the negative impact of deferred compensation on bank efficiency is mainly reflected in non-state-owned banks,What's more,share holdings of banks' executives and the development of shadow banking can weaken the negative effects of executives' deferred compensation on bank efficiency.The contributions of this paper are as follows:First,it helps to enrich the research on debt-based incentive.At present,the research on debt-based incentive in academia is not deep enough especially in the area of banking.The previous literature only tests whether deferred compensastion can achieve the purpose of reducing risks,and it does not concern how to reduce risks,reduce what risks,and whether deferred compensation has other economic consequences beside risks.This article explores related issues and enriches the research on debt compensation incentives.Second,this paper tries to explore risk prevention in the banking industry from the perspective of accounting treatment organically.Both in theory and practice,financial risk prevention is the focus of global attention.However,academics always discuss solutions of financial risk from the finance area.This paper starts from the perspective of the timeliness of loan loss provision,which is one of the common accounting treatment methods,and analyzes whether deferred compensation can promote banks to strengthen accounting measures to prevent financial risks,and finally,to "hold the bottom line that no systemic risk occurs".Thirdly,it is helpful for us to understand deeply and adjust precisely the policy of bank executives' deferred compensation.From a practical point of view,the current regulations on deferred compensation in China are relatively rough.Based on the background of the banking system in China,this paper finds that bank executives' deferred compensation do not only play a positive role.What's more,it may have unexpected negative effects,such as increasing the scale of shadow banking and reducing bank efficiency.And this may have important reference values for China's regulators to make policy adjustments subsequentlly.