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Does managerial pay disparity influence BHC default risk?

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  • Ali, Searat
  • Iqbal, Jamshed
  • Malik, Ihtisham
  • Rahman, Dewan

Abstract

This study investigates the relationship between managerial pay disparity (i.e., pay inequality of the CEO with other top executives and other employees) and default risk (measured using an innovative market-based credit default swap spread). The research relies on panel data for 1992 to 2018 from 198 U.S. bank holding companies (BHCs). We find that managerial pay disparity is negatively related to BHC default risk, suggesting greater pay disparity does not necessarily contribute to excessive risk-taking and instability in the banking sector. However, additional analysis reveals that managerial pay disparity is associated with higher default risk among BHCs with assets of less than USD 50 billion. We also find that greater managerial pay disparity is detrimental to BHC stability in the presence of weaker board monitoring (in the form of less gender-diverse boards and higher board co-option). Overall, these findings suggest that BHC size and board monitoring mechanisms are important factors in understanding the influence of managerial pay disparity on BHC stability.

Suggested Citation

  • Ali, Searat & Iqbal, Jamshed & Malik, Ihtisham & Rahman, Dewan, 2024. "Does managerial pay disparity influence BHC default risk?," International Review of Economics & Finance, Elsevier, vol. 92(C), pages 1250-1269.
    • Handle: RePEc:eee:reveco:v:92:y:2024:i:c:p:1250-1269
    DOI: 10.1016/j.iref.2024.02.032
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    More about this item

    Keywords

    Executive compensation; Managerial pay disparity; Bank risk-taking; Default risk; Credit default swap spread; Co-opted board; Women on board;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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