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This paper aims to explore how external creditors assess firms’ financial aggressiveness in China.

Using bank loan-specific data, the authors investigate whether firms exhibit greater costs of bank loans when they engage in earnings manipulation and whether this association changes when restrictions on lenders’ compensation are promulgated.

The authors find compelling evidence that bank executives charge higher premiums on firms with accrual earnings management to compensate for additional financial risk but do not charge extra loan prices for firms conducting real earnings management (REM). The authors also find that the enactment of Robust Bank Executive Compensation (REBC) enhances the vigilance of bank executives on the overall client firms’ earnings manipulation, with the exception of REM conducted by state-owned firms.

The authors extend the current literature on the cost of external loans by focusing on bank loans and the influence of REBC. This study offers implications for policymakers in China and other emerging economics to control loan default and financial risk.

This paper aims to examine the impact of executive compensation on firm risk-taking behavior, measured by the volatility of stock price returns. Specifically, this analysis explores three hypotheses. First, the impact of short-term and long-term executive compensation packages on firm risk is analyzed to assess whether the packages incentivize risk-taking behavior. Second, the authors test how these compensation and risk relationships were impacted by the financial crisis. Third, they expand the analysis to see if the relationship varies across different industries.

The econometric approach used to examine the executive compensation and firm risk relationship takes the form of two different panel model specifications. The first model is a pooled model using the panel data of executive compensation, the firm-level control variables and volatility of stock market returns. The second model highlights the differences in the relationship between executive compensation and riskiness of firm behavior across industries.

The authors find a significant and robust relationship, showing that during the post-financial crisis period firms tended to use long-term compensation shares to reduce firm risk. They also find that the relationship between various compensation components and firm risk varies across industries. Specifically, the bonus share of compensation negatively impacted firm risk in the financial services industry, while it positively impacted risk in the transportation, communication, gas, electric and services sectors. Additionally, long-term compensation share exhibits an inverse relationship with firm risk in the financial services, manufacturing and trade industries.

The conclusions of this paper suggest that there is indeed a relationship between executive compensation and firm risk across industries. There was a notable change in the relationship however between firm risk and long-term compensation following the financial crisis, where firms used long-term compensation to reduce firm riskiness. In other words, the financial crisis changed the nature of this relationship across S&P 1500 firms. The last key finding is that there exist differences in risk and compensation relationships across industries, and these differences across industries are highlighted across both bonus share and long-term incentive share variables. This is the first study to explore this relationship across industries.

The purpose of this paper is to examine the association between institutional investor ownership and the compensation of executives at US banks during the financial crisis period.

This paper uses a linear regression model to examine the association between institutional ownership and the level of executive compensation at US banks.

Institutional investors influence executive compensation at banks with the impact being most pronounced for the CEO. Ownership by the top five investors is associated with greater total compensation. Active investors have the strongest impact on executive compensation as evidenced by a positive association between active ownership and both equity compensation and total compensation. As well, active ownership is negatively associated with bonus compensation. The paper also finds that passive and grey investors influence compensation but to a less significant extent than active investors.

The results suggest that the monitoring role of active and passive institutional investors is different in the banking industry. As well, institutional investors were likely a driving factor in shaping the compensation packages of the top executive team during the financial crisis period.

Stakeholders at banks should be aware that not all types of institutional investors act as effective monitors over issues such as controlling the amount of executive compensation paid to the highest paid executive, the CEO. Prospective investors should consider the type of institutional investor that owns large blocks of equity when making an investment decision. Namely, the interests of existing institutional investors may differ from their own interests.

This paper provides a new perspective on the monitoring roles played by different types of institutional investors. Furthermore, it provides a more comprehensive analysis by investigating the role of institutional investors in shaping the compensation packages of CEOs and other top executives including chief financial officers (CFOs) who play a vital role in risk management at banks.

This study aims to examine the effect of equity incentives on earnings management that occurs via the use of loan loss provisions by using a sample of 204 bank-year observations over the period 2006-2011.

The authors use the data of 39 European banks to test the main hypothesis. Several valuation models and regressions are used to measure the main proxies for executives’ compensation and the determinant factors of loan loss provisions.

The empirical results reveal that earnings management that occurs via discretionary loan loss provisions is associated with equity incentives in the banking industry. In particular, European banks’ executives with high equity incentives are found to manage reported earnings upwards by reducing loan loss provisions. The results therefore show that income-increasing earnings management via discretionary loan loss provisions is widely practised by the executives of European banks and that this is partly motivated by executives’ compensation.

The findings of this paper present important implications for regulators in the European Union, who should take further steps to reform the regulatory environment to monitor and mitigate the earnings management practices that occur via the manipulation of loan loss provisions. Earnings management practices do not just negatively affect subsequent performance but are also found to lead to firms’ failure. Thus, regulators should take the necessary reforms to protect the wealth of stakeholders (investors, creditors, etc.).

This study provides the first evidence on the relationship between equity incentives and earnings management in the European banking industry. The study sheds more light on an issue of great interest to a broad audience that does not receive much attention in the prior research, thus opening new avenues for future research.

The purpose of this paper is to examine how board tenure affects the compensation of CEOs using a sample of 93 publicly traded US banks.

The paper proposes a CEO allegiance hypothesis whereby long‐term relationships with executives and other directors will shift allegiance from shareholders to executives vs a more traditional expertise hypothesis that predicts superior monitoring of executives by directors with longer tenure. A generalized least squares regression methodology is used to examine the relationship between CEO compensation and outside director tenure.

For the full sample, board tenure variables were found to be insignificant. However, when examining a subsample of firms with CEO tenure of greater than six years or more, the relationship between CEO pay and the median tenure of outside directors becomes positive, supporting a CEO allegiance hypothesis.

On a caveat, since this study relies on data for large bank holding companies over a short period of time, further research is needed to determine if the results carry over to a broader sample of firms and across time.

The results suggest that the independence of outside directors may be compromised when they serve for longer tenure periods together with the same CEO; an important consideration for better corporate governance.

The study provides a unique examination of outside director independence from the perspective of board tenure and the long‐term relationships with executives and other directors that may result in allegiance shifts away from shareholders and towards managers.

In this study, the authors demonstrate the inherent connections between bank risk-taking, performance and executive compensation in the banking sector of China by developing a theoretical model and performing empirical tests with simultaneous equation models.

The authors construct a multi-task principal-agent model to capture agency problems in China, and the model can be extended to various cases. In empirical tests, simultaneous equation models are used to examine the theoretical predictions by eliminating endogenous concerns efficiently compared with the methods in the existing literature.

The results indicate that the regulator fails to provide bank managers with positive incentives to control risk, whereas the compensation guidance policy (2010) proposed by the CBRC alleviates this problem in China. Additionally, the authors established that shareholders reward bank managers for better and more stable performance. The authors propose the introduction of restricted stock options into the compensation design, as the existing compensation design fails to balance the performance and risk-taking of banks.

First, the executive compensation structure and details in China are not available. In addition, the equity-based incentive compensation is forbidden. Therefore, this paper cannot provide more details about how the compensation structure affects bank manager behaviours. Secondly, the database consists only 25 listed commercial banks. Luckily, the assets of these banks could account for the vast majority of China's banking assets. The authors also expect that new methodologies such as machine learning and deep learning will be adopted in the research on bank risk management.

First, the regulator should optimise the compositions and payment rule of bank executive compensations. Secondly, it is advisable to adopt restricted deferred share reward or stock option compensation in due course. Thirdly, the regulator can require the banks that undertake excessive risks and troubled by moral hazard to increase the independent director proportion on the bank board according to the authors' empirical tests that higher independent proportion prevents the risk accumulations effectively. Fourthly, except for absolute compensation, the gap between executives' salary and average employee's income should be taken account.

This study provides a theoretical framework that incorporates the manager behaviours, executive compensation and bank regulations, and it provides empirical tests by solving endogenous concerns. Additionally, this study examines the effects of China's compensation guidelines issued in 2010. The authors believe that this study adds value to the existing literature by illustrating the compensation mechanism in China.

Given the serious question raised by the subprime of the 2008 global financial crisis over the rising practices of excessive rewarding of executives in the USA and European firms, the executive pay-performance nexus has emerged as a popular topic of debate in the contemporary corporate finance research. Conducted mostly on the Anglo-Saxon contexts, research outcomes have been inconclusive and dichotomous. Considering this backdrop, this study aims to investigate the endogenous relationship between executive compensation and risk taking in the context of the USA.

Using a large sample of non-financial firms from 2010 to 2020 based on panel data and two-stage least square regression. In this study, the riskier corporate decision is measured as book leverage and ratio of R&D expense to total assets. Chief executive officers’ (CEO) experience and age are used as instrumental variables, and these are expected to influence compensation incentives and, hence, affect firm riskiness indirectly. Firm size, return on assets and CEO turnover are reported to affect compensation and corporate decisions, therefore, included as control variables. Given that higher executive compensation is related to riskier corporate decision in firms, this study incorporates total wealth (i.e. accumulated equity related compensation) as an additional proxy of compensation, and this selection is justifiable by the perfect contracting notion of the agency theory.

The results of this study show a significant positive and increasing nexus among compensation and riskier corporate decisions. Besides, the compensation level proxied through the percentage of each form of compensation in total compensation is very important as greater equity and greater salary diminishes risk taking.

The outcomes of this study have useful implications for firm stakeholders and policymakers.

The level of pay measured by the percentage of each type of compensation in total compensation is of utmost importance as it can increase or decrease risk taking in corporate decisions.

The purpose of this paper is to illuminate issues surrounding executive compensation as it relates to current understandings of Islamic business law.

The emerging bodies of literature in the fields of executive compensation and opinions of stock options under Shari'a law are reviewed.

It appears that the trend in offering employee stock options as part of a Shari'a compliant compensation package is acceptable in most cases, yet because of its close association with the more problematic idea of derivative transactions, the company must be vigilant in obtaining the approval from its Shari'a Standards Board before offering it as part of an overall compensation package.

Existing quantitative data in this area are limited. Given the qualitative, exploratory nature of the design, generalizability is not as robust as other designs.

The paper makes recommendations about the inclusion of employee stock options as part of a Shari'a compliant executive compensation package.

This paper advances the extant literature on the ethics of executive compensation in general as well as adding to the extant literature on Shari'a compliance of executive compensation packages.

This paper aims to examine the relationship between executive pay disparity and the cost of debt.

The authors use a sample of syndicated bank loans granted to United States (US) listed firms from 1992 to 2014 and adopt the loan yield spread (Chief Executive Officer (CEO) pay slice) as the main proxy for the cost of debt (executive pay disparity). The authors also use the Heckman two-stage model to address the sample selection bias and the two-stage least squares and propensity score matching methods to control the potential endogeneity issues. To test different views about executive pay disparity, the authors adopt the cash-to-stock ratio to proxy for managerial risk-shifting incentives.

The authors find that the cost of debt is significantly higher for firms with larger executive pay disparity, which is robust to sample selection bias, endogeneity concerns, alternative measures and various controls. This positive relationship increases with the risk-shifting incentives of CEOs instead of other top executives, which supports the managerial power view, and is stronger for firms with higher levels of financial distress. The findings suggest that creditors view executive pay disparity are associated with higher credit risk and CEO entrenchment.

This paper reveals one “dark” side of executive pay disparity: it increases the cost of debt and identifies a significant role played by CEOs' risk-shifting incentives. The authors provide direct evidence of the relevance of pay differential to corporate credit analysis.

Using a sample of 466 grants of stock options to executives of Japanese firms over the years 1997–2001, this study tests the managerial power theory of compensation design developed by Bebchuk, Fried, and Walker (2002) and Bebchuk and Fried (2004). This theory argues that managers of firms with weak corporate governance will use their “power” to design executive compensation that is “manager-advantageous.” Using our option grants sample, we test to determine if any of the firm's governance mechanisms are able to limit managerial self-dealing with respect to executive stock options. We find that smaller boards and a higher percentage of independent directors are important governance mechanisms for the control of managerial influences in the design of stock-option compensation. An alternative hypothesis, that firms elect to grant advantageously designed options to encourage risk taking by managers, is not supported by our empirical results. Finally, we determine that the market response to the announcements of such grants varies inversely with the extent to which the options are managerially advantageous. Overall, we conclude that managerial power effects are present in the design of executive stock options and that theory of managerial power advanced by Bebchuk et al. holds internationally.