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Restricting Pay Gap Backfires: The Case of Bank Misconduct

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  • Jiao, Anqi
  • Sun, Ran
  • Liu, Chunbo

Abstract

This study examines the effect of the executive-employee pay disparity on bank misconduct. Using the 2014 “Pay Ceiling Order” mandated by the Chinese government as an exogenous shock, we find that banks with higher pre-reform pay gaps substantially reduced the pay gap to comply with the order. These banks engage in significantly more misconduct activities afterward. This effect is driven by banks with weaker governance structure, and is more prominent for remotely located bank branches, suggesting that the policy-induced decline in pay gap weakens the monitoring mechanisms inside banks.

Suggested Citation

  • Jiao, Anqi & Sun, Ran & Liu, Chunbo, 2024. "Restricting Pay Gap Backfires: The Case of Bank Misconduct," Finance Research Letters, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:finlet:v:61:y:2024:i:c:s1544612324000114
    DOI: 10.1016/j.frl.2024.104981
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    Keywords

    Bank misconduct; executive-employee pay gap; monitoring;
    All these keywords.

    JEL classification:

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

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