Executive compensation, equity structure and risk-taking in Chinese banks

Executive compensation is an important part of the internal governance of commercial banks, and the rationality of the compensation mechanism directly affects the bank’s risk-taking. Based on the panel data of 34 listed small- and medium-sized banks in China from 2012 to 2020, this paper empirically examines the impact and mechanism between executive compensation and the risk-taking level of small- and medium-sized banks. We find that executives’ short-term executive compensation significantly and positively affects the risk-taking level of small- and medium-sized banks, while executives’ long-term executive compensation significantly and negatively affects the risk-taking. Furthermore, considering the specificity of the capital structure of small- and medium-sized banks, we analyse the moderating effect of the capital structure on the above roles and find that there is a partial moderating effect of the capital structure on the relationship between executive short-term compensation and risk-taking in small- and medium-sized banks. This study provides theoretical foundations and countermeasures for improving the executive compensation mechanism and optimising the equity structure to reduce the risk-taking of small- and medium-sized banks and maintain the stability of the financial system.