Inside Debt and Shadow Banking

Posted: 13 Jul 2021

See all articles by Kebin Deng

Kebin Deng

South China University of Technology

Wenxia Ge

University of Ottawa

Jing He

Zhejiang Gongshang University (ZJGSU)

Date Written: July 7, 2021

Abstract

This study examines the effect of inside debt arising from CEO compensation deferral policies on shadow banking. We construct a parsimonious model that shows that increased bank inside debt leads to increased shadow banking. Using a CEO compensation deferral policy imposed on the Chinese banking industry in 2010, we empirically test our theoretical prediction on the effect of inside debt on shadow banking proxied by non-principal-guaranteed wealth management products. We find that banks that adopt the CEO compensation deferral policy exhibit higher levels of shadow banking than their counterparts and that this result is not contingent on bank size or the extent of government control. Moreover, the effect of inside debt on shadow banking is stronger in banks with higher loan-to-deposit and non-performing-loan ratios and in banks with CEO turnover, suggesting that the compensation deferral policy induces CEOs, especially newly appointed CEOs, to do more shadow banking to circumvent regulations regarding the balance-sheet risk and to boost performance.

Keywords: CEO turnover; Compensation deferral; Inside debt; Off-balance-sheet risk; Shadow banking

JEL Classification: G21, G28, K20

Suggested Citation

Deng, Kebin and Ge, Wenxia and He, Jing, Inside Debt and Shadow Banking (July 7, 2021). Journal of Corporate Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3882238

Kebin Deng

South China University of Technology ( email )

Wushan
Guangzhou, AR Guangdong 510640
China

Wenxia Ge

University of Ottawa ( email )

55 Laurier Avenue East
Ottawa, Ontario K1N 6N5
Canada

Jing He (Contact Author)

Zhejiang Gongshang University (ZJGSU) ( email )

Zhejiang
China

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