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Bank CEO inside debt and loan contracting

Author

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  • Chen Liu, Yan Wendy Wu

    (Wilfrid Laurier University)

Abstract

Contrary to the theoretical prediction that CEOs with large debt-based compensation take lower levels of risk, we find that banks with higher CEO inside debt compensation extend syndicated loans with smaller number of lenders, lower spread, less covenant, and higher maturity. Using two-stage selection models, we reconciled these seemingly counter intuitive results of inside debt leads to less conservative loan contracting terms by incorporating banks selection effect. We find that the mechanism of inside debt limit bank risk-taking in loan contracting is through making loans to safer borrowers in the first place, but not through tighter loan terms. These results are consistent and robust to instrumental variables and structure models that control for the endogeneity of relationships.

Suggested Citation

  • Chen Liu, Yan Wendy Wu, 2017. "Bank CEO inside debt and loan contracting," LCERPA Working Papers 0101, Laurier Centre for Economic Research and Policy Analysis, revised 01 Apr 2017.
    • Handle: RePEc:wlu:lcerpa:0101
    Note: LCERPA Working Paper No. 2017-2
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    File URL: http://www.lcerpa.org/public/papers/LCERPA_2017_2.pdf
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    Citations

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    Cited by:

    1. Cheng-Few Lee & Chengru Hu & Maggie Foley, 2021. "Differential risk effect of inside debt, CEO compensation diversification, and firm investment," Review of Quantitative Finance and Accounting, Springer, vol. 56(2), pages 505-543, February.
    2. Mijoo Lee & In Tae Hwang, 2019. "The Effect of the Compensation System on Earnings Management and Sustainability: Evidence from Korea Banks," Sustainability, MDPI, vol. 11(11), pages 1-24, June.
    3. Deng, Kebin & Ge, Wenxia & He, Jing, 2021. "Inside debt and shadow banking," Journal of Corporate Finance, Elsevier, vol. 69(C).

    More about this item

    Keywords

    Inside debt; Loan contracting; Bank Executive; CEO Compensation; risk-taking; syndicated loans;
    All these keywords.

    JEL classification:

    • G21 - Financial Economics - - Financial Institutions and Services - - - Banks; Other Depository Institutions; Micro Finance Institutions; Mortgages
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • J48 - Labor and Demographic Economics - - Particular Labor Markets - - - Particular Labor Markets; Public Policy
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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