CEO Pay Gap and Bank Risk-taking

Abstract

The large compensation received by bank executives is among the many factors blamed for the risk-taking that led to the 2008-2009 financial crisis. We test whether and how pay disparities between CEO and non-CEO executives—the so-called CEO pay gap—influenced risk taking at publicly traded commercial banks in the U.S. between 1992 and 2014. Perhaps surprisingly, we find strong evidence that larger CEO pay gaps are associated with lower risk levels, improved financial performance, and greater information transparency. Our results imply that placing absolute limits on bank CEO pay would likely result in increased bank risk-taking.

Keywords: bank risk-taking, CEO power, CEO pay gap, executive compensation, tournament incentive, discretionary loan loss provision, performance

JEL Classification: G01, G21, G32, G34, J33, M12, M52