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<p>Using data on publicly traded U.S. bank holding companies from 1992 to 2019, we examine whether disparities between CEO and non-CEO executive pay affect banks’ liquidity creation. We find that banks with larger CEO pay gaps create more liquidity, but this positive association emerges only after the global financial crisis. A difference-in-differences analysis around the 2011 implementation of the Dodd-Frank Act corroborates these findings: the interaction between post-2011 and the pay-gap measures is positive and significant, implying that post-crisis compensation and governance reforms strengthened the incentive role of pay inequality. The effect is concentrated in on-balance-sheet liquidity creation and in banks with stronger risk-absorbing capacity, low market competition, and sound governance. Together, the results reveal a dynamic link between executive pay structure and bank behavior, suggesting that post-crisis reforms amplified the motivational channel of pay disparity while overly restrictive pay limits could unintentionally dampen banks’ liquidity-creation capacity.</p>

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Pay Gap Matters: Evidence from Bank Liquidity Creation

  • 期刊论文

  • 出版模式：

    开放获取

  • 发表日期：

    2026年3月13日

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  • Shams Pathan,
  • Chen Zheng,
  • Mamiza Haq,
  • Adrian Wai Kong Cheung,
  • Kwabena Aboah Addo

摘要

Using data on publicly traded U.S. bank holding companies from 1992 to 2019, we examine whether disparities between CEO and non-CEO executive pay affect banks’ liquidity creation. We find that banks with larger CEO pay gaps create more liquidity, but this positive association emerges only after the global financial crisis. A difference-in-differences analysis around the 2011 implementation of the Dodd-Frank Act corroborates these findings: the interaction between post-2011 and the pay-gap measures is positive and significant, implying that post-crisis compensation and governance reforms strengthened the incentive role of pay inequality. The effect is concentrated in on-balance-sheet liquidity creation and in banks with stronger risk-absorbing capacity, low market competition, and sound governance. Together, the results reveal a dynamic link between executive pay structure and bank behavior, suggesting that post-crisis reforms amplified the motivational channel of pay disparity while overly restrictive pay limits could unintentionally dampen banks’ liquidity-creation capacity.