CEO Incentives and Bank Liquidity Managementreview.management.ntu.edu.tw/paper/7491-Z1.pdf · that...

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DOI: 10.6226/NTUMR.201904_29(1).0007

經理人誘因與銀行流動性管理

CEO Incentives and Bank Liquidity Management

Abstract

We investigate the association between CEO incentives and liquidity policy of commercial banks in the United States from 1992 to 2012. Empirical analyses indicate that CEO incentives affected the liquidity holdings of commercial banks, but the effect was different for S&P 1500 and non-S&P 1500 banks. We found that S&P 1500 banks with higher CEO equity ownership usually had lower proportions of loan commitments, were less involved in non-interest generating activities, but maintained higher levels of liquidity. Our study indicates that S&P 1500 banks with different level of CEO incentives had different business policies, which affected bank liquidity holdings and bank performance, but this relation was not clear for non-S&P 1500 banks. Our results complement current understanding of how different CEO incentives affect bank liquidity policy.【Keywords】 bank liquidity, CEO incentives, performance

摘要

本研究利用 1992年到 2012年美國商業銀行的資料，探討經理人誘因（CEO incentives）與銀行流動性管理的議題。實證分析顯示美國銀行經理人誘因會影響銀行的流動準備，但對 S&P1500 銀行與非 S&P1500銀行的影響效果不同。 CEO 持股較高的S&P1500銀行，通常承做較低比例的承諾性放款和較多的傳統商業銀行業務，且維持較高的流動性。研究也發現，在 S&P1500銀行中，不同 CEO 誘因的會影響銀行的放款決策，進而影響銀行的流動性與營收表現，但此關係在非 S&P1500銀行中並不明顯。本研究結果有助於進一步瞭解銀行經理人誘因對銀行流動性的影響。

【關鍵字】銀行流動性、經理人誘因、銀行表現

I-Ju Chen, College of Management, Yuan Ze University陳一如 /元智大學管理學院

Wei-Chih Lin, College of Management, Yuan Ze University林暐智 /元智大學管理學院Received 2016/5, Final revision received 2017/3

NTU Management ReviewVol. 29 No. 1 Apr. 2019, 255-322

Forthcoming


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NTU Management Review Vol. 29 No. 1 Apr. 2019

CEO Incentives and Bank Liquidity ManagementThe Basel-based Bank for International Settlements, often called the central bankers'

central bank, will also assess findings of a report published last month by the Senior Supervisors Group, made up of regulators from France, Germany, Switzerland, the U.K. and the U.S., showing that banks hit hardest by the market turmoil had less understanding and control over their balance sheets and liquidity needs.

~ Adam Bradbery, Wall Street Journal, New York, N.Y., Apr. 12, 2008.

1. IntroductionMany recent analyses have shown that malfunctions in the banking system were a

major cause of the U.S. subprime mortgage crisis in 2007 and the subsequent global financial crisis in late 2010 (Fahlenbrach and Stulz, 2011; Loutskina, 2011). As the quoted news report indicates, underestimation and ignorance of bank liquidity (i.e., the amount of cash or near cash assets a bank has; the more liquid assets a bank has, the higher the bank’s liquidity) needs were major causes of bank failures. Commercial banks act as financial intermediaries through the disbursement of cash to depositors (who withdraw from their accounts) and provision of loans to borrowers. This “transformation” service creates liquidity that funds demand, but it also creates liquidity risk for banks that have unbalanced cash flows from assets and liabilities (Barth and Bennett, 1975; Gatev, Schuermann, and Strahan, 2007; Rose and Hudgins, 2010).

The literature has shown that liquidity risk can cause serious financial problems for banks when they are unable to pay short term obligations that are due (Diamond and Dybvig, 1983). However, the average ratio of U.S. commercial banks’ total assets held as liquid securities decreased by 7.33 percent between 1976 and 2007 (Loutskina, 2011). Acharya and Naqvi (2012) suggested that bank liquidity management is one of the key causes of financial crises. Fahlenbrach and Stulz (2011) found that banks with higher CEO incentives took higher risk before financial crises and then performed worse in crises. Their study indicated that the alignment of CEO incentives with shareholders’ interests plays an important role in bank performance. Studies have shown that the level of transaction deposits, unused loan commitments (Kashyap, Rajan, and Stein, 2002; Gatev et al., 2007), securitization (Loutskina, 2011), and bank capital (Berger and Bouwman, 2009) are important factors of bank liquidity; however, no study to date has considered how managerial incentives determine a bank’s liquidity policy. This study attempts to fill this gap. We hypothesize that CEOs with higher incentives to maximize shareholder

wealth take risks that they view as judicious and profitable for shareholders, so their liquidity management policies are different from the policies implemented by CEOs at banks that have lower incentives.

To investigate this relationship, we collected data from a sample of banks from WRDS Compustat Bank file and Call Report for the period 1992 to 2012. To measure CEO incentives, we collected data from ExecuComp and proxy statements for each bank in the sample. After data analysis, we found that CEOs’ compensation packages did not significantly change after the 2007 financial crisis. However, the dollar value of the annual stock grants significantly increased, but cash bonus and other compensation tended to decline for both S&P 1,500 banks and non-S&P 1,500 banks after the financial crisis. The CEOs equity portfolio was, on average, around eight times their annual compensation, but the ratio decreased after the financial crisis. The substantial decline in stock price significantly reduced the equity portfolio value, lowering the sensitivity of the CEO’s equity portfolio to changes in the bank’s stock price, and also reduced the risk exposure of the CEO’s equity portfolio after the financial crisis.

Furthermore, univariate analyses showed that banks that were managed by CEOs who received larger cash bonuses tended to have higher liquidity ratios, while equity-based CEO incentives had different impacts on the bank liquidity holding policy for different types of banks. Banks within the S&P 1,500 that had high CEO equity incentives usually maintained greater bank liquidity, but banks not within the S&P 1,500 that had high CEO equity incentives maintained significantly lower liquidity ratios than banks with low CEO equity incentives.

After determining that bank liquidity policies differ with CEO’s incentives, we further investigated whether CEO’s incentives were associated with bank risk attitude, which could influence bank policies. Previous studies suggested that CEO compensation schemes affect their risk taking attitudes on investment decisions (Coles, Daniel, and Naveen, 2006; DeYoung and Rice, 2004; Chen, Steiner, and Whyte, 2006). We further investigate if bank CEO incentives affect the business policy decisions and the liquidity holdings. Our analyses found evidence supporting this relationship. For example, banks managed by CEOs who received higher cash bonuses tended to make higher loan commitments, take more deposits, and operate in more non-interest earning business activities than banks with lower CEO cash bonuses. In addition, banks managed by CEOs who received higher equity dollar incentives tended to have higher loan commitments, take fewer deposits, and operate more non-interest earning activities.


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Multivariate regression results confirmed that CEO incentives generally had significant impacts on bank liquidity holding policies. Among the measures of CEO incentives, CEO equity ownership and equity risk exposures had a significantly positive impact on the level of liquidity holding. This effect was particularly strong for S&P 1,500 banks. Specifically, we found that S&P 1,500 banks with higher CEO equity incentives usually had lower loan commitments and were less involved in non-interest generating activities, but they maintained higher levels of liquidity. They also had higher performance compared to S&P 1,500 banks with lower CEO incentives. Finally, we implement 2-stage least square regressions to explore the relation between CEO incentives, bank performance, and liquidity holding policies. The results generally show that CEO incentives played an important role in determining liquidity holding and affected performance for S&P 1,500 banks.

Recent research has emphasized the importance of bank liquidity management. Liquidity acts as a “buffer” when banks need to meet unexpected demands from depositors and borrowers. Poor liquidity management may lead banks to pay less attention to the liquidity holding and jeopardize their ability to cope with sudden turmoil in financial markets (Gatev et al., 2007; Loutskina, 2011; Acharya and Naqvi, 2012). Several studies have investigated the factors that affect bank liquidity, such as the synergy effect between demand deposits and unused loan commitment (Gatev et al., 2007) and securitization (Loutskina, 2011); however, no study, to the best of our knowledge, has investigated the role of CEO incentives in determining bank liquidity holdings. Therefore, our study contributes to the literature by investigating these effects surrounding the 2007 financial crisis, and the results suggest that the relationship between CEO incentives and liquidity generally only existed in S&P 1,500 banks, and the relationship was less significant prior to the financial crisis but became more significant after the crisis. We further document that the different CEO incentives will lead to different business policies, such as loan commitment and non-interest income activities, and different levels of bank liquidity. Our results are robust by considering different model specifications. We also found that of S&P 1,500 banks, those with higher CEO incentives generally have higher operating performance than banks with lower CEO incentives. Taken together, our results provide partial evidence that CEO incentives affect bank liquidity management, especially for S&P 1,500 banks. A clear association between CEO incentives and bank liquidity level was observed after the financial crisis. Our study indirectly provides supplementary evidence that CEO’s negligence of managing bank liquidity policy causes excessive risk-taking and over-lending, which are main reasons for financial crises (Acharya and Naqvi, 2012).

Our study also shares the same theme as Fahlenbrach and Stulz’s (2011) study, which examined the association of CEO incentives with bank policies and performance. Although our study did not aim to explore the linkage between financial crises and CEO incentives, our study found that S&P 1,500 banks with higher CEO equity incentives usually had different business policies and maintained relatively higher levels of liquidity. The sample of S&P 1,500 banks also had higher performance compared to S&P 1,500 banks with lower CEO incentives. However, the association between CEO incentives, liquidity policy, and bank performance was unclear for non-S&P 1,500 banks. These relationships were not explored in Fehlenbrach and Stulz’s (2011) or other studies, so our findings are important contributions to the literature.

Finally, our study also complements the banking literature related to non-S&P 1,500 banks. Previous studies mainly focused on S&P 1,500 banks, which are large and have been listed on the S&P composite index; few studies have investigated the difference in CEO incentives between listed banks and non-listed banks. Banks within the S&P 1,500 usually receive higher levels of external scrutiny and supervision from market investors, stock analysts, and the media compared to non-S&P 1,500 banks. The different amounts of external scrutiny may lead to different results for these two groups in regard to the linkage between CEO incentives and bank liquidity policy. Berger and Bouwman (2013) found that capital increased small banks’ survivorship and enhanced the bank’s performance during banking crises. Their results highlight the importance of bank size on bank performance. However, their study did not investigate the role of CEO incentives in different sized banks. Our study shows that CEO incentives significantly affect bank business policies, and the effect on policy decision for S&P 1,500 banks and non-S&P 1,500 banks is different. Further study could investigate the reason for this discrepancy.

The remainder of this paper is organized as follows. In Section 2, we review the literature and discuss our research hypotheses. Section 3 describes the data, variables, and research design. Section 4 presents our empirical results and the final section concludes with a discussion of the implications and findings.

2. Literature Review and Hypotheses Development2.1 Previous Studies on the Determinants of Bank Liquidity2.1.1 Synergy Effect between Transactions, Deposits, and Unused Loan Commitment

Commercial banks engage in two distinct types of activities—deposit-taking and lending. Deposits provide a bank with a cash base, but they increase the bank’s need for liquidity because depositors may show up at any time and withdraw money. Loan


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commitments and credit lines, which are loans that the borrower has the option draw down at any time over a specified period of time, also require and affect liquidity. Thus, Kashyap et al. (2002) argued that a bank’s loan commitments are like demand deposits. Since both demand deposits and loan commitments offer customers liquidity on demand to meet unpredicted needs, there is a synergy between deposit-taking and lending activities as long as deposit withdrawals and commitment drawdowns are not too highly correlated. Similar to Kashyap et al. (2002), Gatev et al. (2007) argued that banks can use inflows from transaction deposits to offset the liquidity demanded by increased borrowing and then maintain these cash holdings to reduce risk. Therefore, when unused loan commitments rise, banks with high levels of transaction deposits should not have increased risk, whereas banks with low levels of transactions deposits experience increased risk increase. The reduced risk is a diversification benefit of liquidity risk management on both the asset-side (loan commitments) and the liability-side (transaction deposits), and it is termed “deposit–lending risk management synergy.” Therefore, banks with higher levels of both transaction deposits and unused loan commitments are expected to experience a stronger synergy effect in the offset of liquidity risk, which requires lower liquidity reserves compared to banks with lower synergy effects.2.1.2 Bank Securitization

Commercial banks or deposit-taking institutions traditionally played the role of liquidity provider (Diamond and Dybvig, 1983; Holmstrom and Tirole, 1998; Kashyap et al., 2002). However, their role changed to intermediaries between borrowers and capital markets with the emergence of securitization (Loutskina, 2011). Securitization, or converting illiquid assets into liquid securities, has grown tremendously in recent years. Using this instrument, banks can fund new loans by securitizing them to the market. It provides banks with a new source of financing for investment opportunities.

Loutskina (2011) examined the role of securitization activities in bank liquidity and funding management. In particular, she investigated how securitization changes the way that individual banks manage funding and liquidity as well as how these changes affect the traditional links between bank liquidity, cost of funds, and loan supply. She argued that securitization helps to transfer illiquid loans into marketable securities through the financial market; therefore, it provides a new source of liquid assets, allowing banks to carry fewer liquid assets to serve unexpected demands from depositors and borrowers. Loutskina (2011) empirically found that liquid assets on bank balance sheets have decreased as banks’ ability to securitize loans has increased. She also showed that

securitization makes loan growth (especially business loans) less sensitive to cost of fund shocks. Therefore, we infer that there is a negative relationship between bank securitization and liquidity reserves. Banks with higher levels of securitization are better able to transform their loan portfolios into assets with higher liquidity, and thus need less liquidity reserves compared to those with lower levels of securitization.2.1.3 Bank Capital

The literature holds two different theories about the association between bank capital and liquidity creation. One is the “financial fragility-crowding out” effect, which predicts that bank capital has a negative effect on liquidity creation because additional capital reduces the fragility of the bank’s capital structure, so banks have less incentive to commit to monitoring, inducing lower levels of liquidity creation (Diamond and Rajan, 2000, 2001; Gorton and Winton, 2000). The other theory is the “risk absorption” hypothesis, which predicts a positive effect of bank capital on liquidity creation for the reason that capital absorbs bank risks and expands banks’ risk-bearing capacity. Hence, higher bank capital increases the capacity to take risk, which induces higher liquidity creation (e.g., Bhattacharya and Thakor, 1993; Repullo, 2004; Von Thadden, 2004; Coval and Thakor, 2005). Berger and Bouwman (2009) conducted an empirical test to investigate how bank capital affects liquidity creation. They found that the “financial fragility-crowding out” effect is stronger for small banks whereas the “risk absorption” effect is stronger for large banks. Berger and Bouwman (2009) argued that larger banks have more ability to offer large loans or engage in other off-balance sheet activities, and they are always exposed to intense monitoring by regulatory agents and market participants; therefore, higher capital works to absorb risk and expands banks’ risk-bearing activities. On the other hand, small banks operating in less segmented markets may have a significant overlap between those that invest in bank equity and those that invest in bank deposits, so the increase in capital is more likely to crowd out bank deposits. Besides, small banks are less able than large banks to absorb other liabilities such as subordinated debt. Adding these two effects together, they suggested that capital is more likely to crowd out deposits at small banks than at large banks, decreasing their ability to create liquidity. Berger and Bouwman (2013) reemphasized the importance of bank capital and argued that bank capital can enhance a bank’s survival probability and market share. Their empirical results support the claim that bank capital helps small banks avoid being crowded out by large banks, and it enhances large banks’ performance during banking crises.


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Based on the cited studies, we conjecture that a positive relation between bank capital and bank liquidity exists. Banks with higher levels of capital are better able to take risk and create more loan portfolios, and therefore require less liquidity reserves compared to banks holding lower levels of capital.2.1.4 Business Cycle

A related issue to bank capital is the business cycle. Banks tend to raise their capital buffers during economic upturns following the assumption that risks may increase during booms. Therefore, an increase in capital buffers should offset the negative effects of pro-cyclical requirements. However, some institutions fail to characterize the cyclical nature of output, so they underestimate actual risks, and therefore there exists a negative relationship between capital buffers and cyclical position. Ayuso, Pérez, and Saurina (2004) empirically tested this issue and found that there was a significant relation between stage of economic cycle and capital buffers for Spanish banks.

Acharya, Shin, and Yorulmazer (2011) developed a theoretical model to address the relation between bank liquidity choices under different business status. They argued that banks may hold more liquid assets in business downturns because these assets can be used to acquire additional assets from distressed banks at fire-sale prices during economic crises. Surviving banks acquiring cheap assets stand to make substantial gains. Thus, banks tend to hold more liquid assets not only to ensure survival during crises but also to acquire additional assets at fire-sale prices. According to this argument, bank liquidity levels move counter to the business cycle, which fluctuates together with the demand for risky loans.

2.2 Do CEO Incentives Affect Bank Liquidity Holdings?Previous studies have documented several important factors that affect bank liquidity

holdings, such as the synergy effect between demand deposits and unused loan commitments (Kashyap et al., 2002; Gatev et al., 2007), securitization (Loutskina, 2011), bank capital (Berger and Bouwman, 2009) and macroeconomic factors (Acharya et al., 2011). However, to the best of our knowledge, no study has investigated the role of CEO incentives in determining bank liquidity policy. Since The Bank for International Settlement argues that under-estimating or ignorance of liquidity is a major cause of severe losses during market turmoil (Bradbery, 2008), it is crucial to examine if bank liquidity policy is associated with managerial incentives, resulting in the changing of bank policies and performance.

Needless to say, CEO incentives have long been emphasized as crucial elements of firm success. Fama and Miller (1972) highlighted the importance of CEO compensation in firms’ investment decisions. Good compensation designs may align the interests of CEOs with those of shareholders, which leads to value-maximizing decisions for shareholders (Bizjak, Brickley, and Coles, 1993; Datta, Iskandar-Datta, and Raman, 2001; Lai and Wu, 2016). Studies have found that the financial industry has relatively highly compensated individuals compared to non-financial industries (Kaplan and Rauh, 2009) and pay-for-performance sensitivity of CEO pay at banks increased because of the increase in industry compensation after deregulation (Hubbard and Palia, 1995; Crawford, Ezzell, and Miles, 1995). According to Fahlenbrach and Stulz (2011), poorly designed CEO incentives were seen as one of the critical causes of financial crises by practitioners and policy-makers (Blinder, 2009; Solomon and Paletta, 2009; Cho, Goldfarb, and Tse, 2009). Although their results were inconclusive, their study did indicate that CEOs with better incentives were more willing to take risks that looked profitable ex ante, but had unexpectedly poor outcomes ex post. In the same vein as Fahlenbrach and Stulz (2011), we wonder whether CEO incentives affect bank liquidity management. Therefore, we hypothesize that CEOs with better incentives to maximize shareholder wealth take risks that they view as judicious or profitable to shareholders, so their liquidity management is different from banks with inferior CEO incentives.

Furthermore, most banking studies have focused on listed banks. They have seldom addressed the differences in managerial incentives and liquidity policies between listed banks and non-listed banks. We propose that the external scrutiny or supervision from government agents, stock analysts, and media coverage for S&P 1,500 banks is much higher than that for non-S&P 1,500 banks. If there is an association between managerial incentives and bank liquidity, the observed linkage for different types of banks may be different. Therefore, we divided our sample into S&P 1,500 banks (which are listed banks included in the S&P 1,500 index) and non-S&P 1,500 banks (which are banks not included in the S&P 1,500 index).

3. MethodologyThis section describes the data sources, variables, and research design.


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3.1 Data Sources We gathered our sample from the WRDS Compustat Bank file, which mainly

consists of US financial institutions with Standard Industry Classification (SIC) codes 602 (commercial banks) and 603 (saving institutions) from period 1992 to 2012. Because our study examined whether bank liquidity policy was associated with CEO incentives of commercial banks, our banks within the sample had to meet the following criteria:

1. Complete information for all the relevant measures had to be available. Therefore, banks with missing information on total deposits, total loans, and liquid funds were excluded from the sample.

2. Banks must not have gone through a merger during the research period. Mergers data from the Federal Reserve National Information Center were analyzed, and any banks that went through a merger during this period were excluded from the sample.

3. To avoid the possibility of outliers having outsized influence on the results, we eliminated all bank-years with 1) asset growth over the last year in excess of 50%, 2) total loan growth exceeding 100%, 3) total loans-to-asset ratio below 10%, and 4) share of credit card loans in the loan portfolio above 50%. These criteria were similar to those used in Loutskina (2011).

4. Data about CEO incentives had to be available either in a database or through manual collection; however, we did not require that each bank have all CEO incentives data available.

Data from Compustat Bank database provided us with most of the financial data needed to conduct our empirical analysis except for bank liquidity, transaction deposits, commitments, and the amount of loans in different categories for each bank.1 These data were available from the Report of Condition and Income (named “Call Report”) that all banks in the U.S. that are regulated by the Federal Reserve System, Federal Deposit Insurance Corporation (FDIC), and the Comptroller of the Currency are required to file.2

After merging with Compustat data, there are 3,552 observations (450 banks) that including 424 observations of S&P banks (26 banks) and 3,128 observations of non-S&P

banks (424 banks).3 We collected stock return data from the Center for Research in Security Prices (CRSP).4 Data on interest rates were available daily from the Federal Reserve Board of Governors.

To measure CEO incentives, we relied on the data collected from the ExecuComp database, which provides information about CEO compensation in terms of salary, bonus, and stock options granted since 1992. Because the ExecuComp database only tracks executive compensation in S&P 1,500 firms, we hand collect all compensation data regarding the measures of CEO incentives for non-S&P 1,500 banks in this study.5 After all data was compiled, our sample contained 1,674 observations (209 banks) that include 433 observations (35 banks) of S&P 1,500 banks (denoted as S&P 1,500 banks) and 1,241 observations (174 banks) of non-S&P 1,500 banks (denoted as non-S&P 1,500 banks).6

3.2 Variables3.2.1 Variables of Interest3.2.1.1 Liquidity Ratio

The dependent variable was bank liquidity ratio, which was measured by liquid assets divided by total assets. Specifically, bank liquidity asset was the sum of Fed funds sold and securities purchased under agreements to resell, securities held to maturity, and securities available for sale.3.2.1.2 CEO Incentives

To test the impact of bank CEO incentives on the bank liquidity management, we followed previous studies such as Jiang (2009) and Fahlenbrach and Stulz (2011) and measured CEO incentives in five different categories: (1) CEO short-term incentive was

1 We have 7,750 Compustat observations (1,035 banks), including 857 observations of S&P 1,500 banks (52 banks) and 6,892 observations of non-S&P banks (983 banks) from years 1992 to 2012.

2 We have total 51,001 observations (2,927 banks) from Call report from years 1992 to 2012.

3 The ratios of liquidity, transaction deposits, and unused loan commitments were calculated using the data from the Call Report, and the sample size decreased dramatically once we combined them with the other research variables. This was because bank identification numbers used in the two different datasets are not identical, which made the data compilation difficult and reduced the sample during this process. Even after the individual bank information was checked manually, the situation remained unchanged.

4 We have 7,668 CRSP observations (1,022 banks), including 852 observations of S&P 1,500 banks (52 banks) and 6,816 observations of non-S&P 1,500 banks (970 banks) from years 1992 to 2012.

5 We have total 4,861 compensation observations (536 banks), including 1,045 observations of S&P1,500 banks (79 banks) and 3,816 observations of non-S&P1,500 banks (457 banks) from years 1992 to 2012.

6 Not every sample bank had sufficient data for analysis each year. Therefore, the number of observations for each bank in different years varied during the study period.


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gauged by the ratio of cash bonus to cash salary; (2) equity incentives ($) was measured by dollar gains of CEO portfolio from 1% change in stock price; specifically, it equaled the dollar change in the executive’s stock and option portfolio value for a 1% change in the stock price; (3) equity incentive (%) was measured by percentage shares owned by CEO; (4) equity risk exposure ($) was equal to the dollar change in the CEO’s equity portfolio value for a 1% change in stock volatility; and (5) equity risk exposure (%) was defined as the percentage change in the equity portfolio value for a 1% increase in stock volatility and was calculated from all option series held by the CEO.3.2.2 Other Variables

We also considered several important variables that previous studies have shown to be influential to bank liquidity (Kashyap et al., 2002; Gatev et al., 2007; Loutskina, 2011; Berger and Bouwman, 2009; Ayuso et al., 2004; Acharya et al., 2011). Variables included bank-level variables such as LoanCommitment, DepositBase, Bank Capital, Share of Deposit Financing, and the market condition variable—Business Cycle.

LoanCommitment was the ratio of unused loan commitments to commitments plus loans. DepositBase was the ratio of transactions deposits to total deposits. Bank Capital ratio was total equity capital as a proportion of bank total asset. Share of Deposit Financing was the ratio of total deposits to total assets. Business Cycle was the GDP growth rate of the United States. For the performance regression, we also controlled for bank size and non-interest income ratio (Fahlenbrach and Stulz, 2011). Bank size was defined as the natural log of gross total assets, which was equal to total assets plus the allowance for loan and lease losses and the allocated transfer risk reserve. Non-interest income was the ratio of non-interest income to net income. We also divided our sample period into two sub-periods: 1992 to 2006 and 2007 to 2012. The financial crisis of 2007 resulted in the collapse of financial markets and systems. The sudden change of market conditions after 2007 increased the difficulty in raising external finance and may have altered the incentives for banks to hoard their liquidity (Acharya et al., 2011). Although the literature shows that bank securitization helps transfer illiquid loans into marketable securities and lowers the incentive for banks to maintain liquidity for unexpected demands, we did not include this factor in our regression analyses because securitization activities in the Call Report could not be matched with the Compustat Bank database.7 The definitions for all variables are listed in the Appendix.

3.3 Main Regression Specification We used the following regression specification, modified from Loutskina (2011), to

test the relation between bank liquidity and CEO incentives.

BankLiquidityi,t = β0 + β

1CEOincentivesi,t-1 + β

2LoanCommitmenti,t-1 +

β3DepositBasei,t-1 + β

4(LoanCommitmenti,t-1×DepositBasei,t-1) +

β5BankCapitali,t-1 + β

6Share of Deposit Financing +

β7BusinessCyclei,t-1 + μi,t-1 (1)

All regressions included firm and year dummies as control variables, and standard errors were adjusted for heteroskedasticity and potential clustering of the residual at the firm level.

4. Empirical Results4.1 Sample Statistics

Table 1 presents the summary statistics of all research variables during the sample period. Because the research variables in this study were compiled from a combination of different datasets and hand collected data, the number of observations for each variable varied with data availability. To maximize the sample size and validate the empirical results, we required that the sample banks have data for CEO compensation, liquidity ratio, loan commitment and deposit available, and they were then included in the further empirical analyses.8

The mean (median) liquidity ratio and the ratio of transactions deposits to the total deposits (Deposit Base) of sample banks was 14.70% (12.81%) and 7.31% (5.43%), respectively. Both numbers were smaller than the ones reported in Kashyap et al. (2002). The divergence between these two studies may be due to different research periods. Commercial banks were allowed to extend into investment banking and other financial services businesses after 2000. The operational flexibilities of the banking business may have resulted in decreased liquidity ratio and changed the revenue breakdown after the 2000s. The mean (median) loan commitment ratio of the sample banks was 14.63% (13.74%), quite similar to the one reported in Kashyap et al. (2002).

8 Some sample firms disclosed the aggregate amount of CEO compensation, but they did not report details of each component. Therefore, the number of observations in each component of CEO incentives was less than the number of observation for firms with available CEO compensation.

7 Even we tried to merge the data together, our sample size was dramatically reduced and the results lacked explanatory power.


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270 271


Next, we investigated the change in CEO incentives of commercial banks during the research period. We computed the mean and median values of CEOs compensation, equity portfolio, equity incentives, and equity risk exposure for the sample banks and conducted the difference test before and after the financial crisis. All dollar values are in inflation-adjusted 2010 dollars. Panels A to C of Table 2 present the results for the whole sample, S&P 1,500 banks, and non-S&P 1,500 banks, respectively. We found that CEO total compensation package of commercial banks did not significantly change during the study period (see panel A of Table 2). Specifically, the mean (median) value of CEOs total compensation (including new options and stock grants, but excluding gains from exercising options) was 1,064.37 (714.58) thousands from 1992 to 2006, and 1,125.69 (753.05) thousands from 2007 to 2012, respectively. The means were not significantly different during these two periods. We decomposed total compensation into the following five components: salary, cash bonus, dollar value of annual stock grant, dollar value of annual option grant, and other compensation. We found that the dollar value of annual stock grant significantly increased, but cash bonus and other compensation tended to decrease for both S&P 1,500 banks and non-S&P 1,500 banks after the financial crisis. Because the components of CEO compensation changed in different ways during the financial crisis, this might explain why there were insignificant changes in CEO compensation during this period.

We also examined the importance of CEO equity portfolio of stocks and options as the mechanism of CEO incentives (Hall and Liebman, 1998; Core and Guay, 1999). Consistent with the previous literature, the value of the equity portfolio was larger relative to the total annual compensation. The mean (median) value of total equity portfolio was 7,127.47 (1901.38) thousands from 1992 to 2006 and the mean (median) ratio of the overall equity portfolio divided by total annual compensation was 8.07 (2.28) from 1992 to 2006. However, the equity portfolio as the CEO incentive mechanism became less important after the financial crisis as we observed that the mean (median) ratio of the overall equity portfolio divided by total annual compensation significantly decreased, particularly for non-S&P 1,500 banks. We can infer that banks put less weight on the equity proportion of CEO compensation after the financial crisis.

Panel A of Table 2 also presents two measures of sensitivity of the equity portfolio of the CEO to changes in the bank’s stock price. The mean (median) percentage ownership from shares for the whole sample from 1992 to 2006 was 0.08% (0.06%) and significantly

decreased to 0.07% (0.05%) from 2007 to 2012. The decrease in ownership was particularly significant for non-S&P 1,500 banks. The average (median) dollar gain was 10,326.06 (4,799.72) thousands for a 1% change in bank equity value from 1992 to 2006 and significantly decreased to 6,890.62 (2,571.61) thousands from 2007 to 2012. We also calculated the percentage change and dollar change in the equity portfolio value of a CEO for a 1% increase in volatility using options to examine the risk exposure of CEO equity portfolio. We found that mean (median) percentage equity risk sensitivity significantly decreased after the financial crisis.

Overall, the evidence shown in panel A of Table 2 shows that the mean (median) total compensation of bank CEOs did not significantly change after financial crisis. The equity portfolio as the CEO incentive mechanism became less important after the financial crisis, as the substantial decline in stock price significantly reduced the equity portfolio value, lowering the sensitivity of the equity portfolio of the CEO to changes in the bank stock price, and also decreased the risk exposure of CEO equity portfolio after the financial crisis. Banks increased awards of stock grant to CEOs as an incentive scheme to motivate managers after the financial crisis.


272 273


Table 2 Summary Statistics of CEO Compensation, Equity Portfolio, Equity Incentives, and Equity Risk

This table presents mean and median values of CEO compensation, equity portfolio, equity incentives, and equity risk exposure for the sample banks from 1992 to 2012. We conducted the difference test before and after the financial crisis. The pre-financial crisis period was 1992 to 2006 (sub period B). Years 2007 to 2012 (sub period C) is the post crisis period. Panels A to C present the results for the whole sample, S&P 1,500 banks, and non-S&P 1,500 banks, respectively. S&P 1,500

banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean and median were assessed using a t-test and a Wilcoxon rank-sum test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Period A: 1992-2012 Sub-period B: 1992-2006 Sub-period C: 2007-2012 Difference (Periods C vs. B)

Variable N Mean Median N Mean Median N Mean Median Mean Median

Panel A: All banks

1. Annual compensation

Total compensation 1,674 1,083.48 725.50 1,222 1,064.37 714.58 452 1,125.69 753.05 61.32 38.48*

Salary 1,672 509.66 424.54 1,220 515.30 425.53 452 497.24 419.56 -18.06 -5.97

Cash bonus 1,553 382.39 201.74 1,149 399.33 204.20 404 342.64 197.47 -56.69** -6.73

Dollar value of annual stock grant 412 295.05 83.68 117 226.04 21.53 295 320.69 108.79 94.65** 87.26***

Dollar value of annual option grant 449 157.65 38.88 134 159.47 26.40 315 156.90 42.23 -2.57 15.83

Other compensation 1,614 75.51 40.72 1,169 79.35 40.58 445 67.22 41.02 -12.13*** 0.44

Cash bonus/salary 1,437 0.73 0.56 1,070 0.74 0.54 367 0.71 0.57 -0.03 0.03

2. Equity portfolio value

Value of total equity portfolio 1,672 6,558.44 1,849.54 1,220 7,127.47 1,901.38 452 5,298.16 1,813.13 -1,829.31*** -88.25

Value of shares 1,661 1,556.91 386.01 1,211 1,698.70 428.59 450 1,242.88 276.60 -455.82*** -152.00***

Value of exercisable options (Black-Scholes)

1,145 3,969.00 955.66 1,018 4,368.00 1,089.37 127 1,430.18 31.69 -2,937.82*** -1,057.68***

Value of unexercisable options (Black-Scholes)

1,086 898.22 129.25 959 995.57 180.42 127 315.69 0.00 -679.88*** -180.42***

Value of unvested restricted stock 828 2,591.47 461.12 552 3,521.53 847.76 276 1,187.75 218.82 -2,333.78*** -628.93***

Value of total equity portfolio/total annual compensation

1,672 7.28 2.07 1,220 8.07 2.28 452 5.51 1.79 -2.57*** -0.50***

Value of shares/salary 1,659 3.60 0.92 1,209 3.88 1.06 450 2.97 0.63 -0.91*** -0.43***

3. Equity portfolio incentives

Percentage ownership from shares 1,623 0.08 0.05 1,186 0.08 0.06 437 0.07 0.05 -0.01** -0.01*

Dollargain from 1% increase in stock price (equity incentives($))

1,486 9,207.95 3,812.53 1,048 10,326.06 4,799.72 438 6,890.62 2,571.61 -3,435.44*** -2,228.11***

4. Equity portfolio risk exposure

Percentage equity risk (equity risk exposure(%))

1,486 -0.17 -0.08 1,048 -0.11 -0.02 438 -0.29 -0.21 -0.18*** -0.19***

Dollar equity risk (equity risk exposure($)) 1,486 -834.16 -450.44 1,048 -626.28 -429.67 438 -1,279.47 -468.31 -653.19*** -38.64


274 275




Panel B: S&P 1,500 banks


Total compensation 433 1,841.65 1,694.64 315 1,756.95 1,485.48 118 2,029.46 2,220.06 272.51 734.58

Salary 433 736.24 740.88 315 739.82 740.88 118 728.31 739.25 -11.50 -1.63

Cash bonus 422 693.59 584.59 309 719.68 615.74 113 634.05 480.03 -85.63** -135.71*

Dollar value of annual stock grant 152 539.00 367.23 38 449.52 155.44 114 568.82 394.00 119.30*** 238.56***

Dollar value of annual option grant 147 309.93 88.14 38 369.43 295.91 109 289.16 76.35 -80.27 -219.56

Other compensation 430 117.14 75.64 312 119.79 79.48 118 111.29 68.78 -8.50 -10.69

Cash bonus/salary 387 1.07 1.00 286 1.11 1.08 101 0.98 0.80 -0.13 -0.28*


Value of total equity portfolio 433 6,800.39 1,986.05 315 7,149.03 1,843.47 118 6,024.29 2,298.46 -1,124.74 454.99

Value of shares 429 882.35 205.27 312 1,054.85 231.10 117 498.36 176.12 -556.49*** -54.98**


390 7,263.38 3,051.75 297 9,369.76 5,539.72 93 1,622.97 0.00 -7,746.79*** -5,539.72***


383 1,601.65 299.13 290 2,056.76 965.57 93 413.29 0.00 -1,643.47*** -965.57***

Value of unvested restricted stock 373 3,645.74 1,072.25 259 4,396.83 1,339.58 114 2,224.75 925.62 -2,172.08** -413.96


433 3.15 1.08 315 3.87 1.01 118 1.55 1.15 -2.32*** 0.14

Value of shares/salary 429 1.59 0.27 312 1.92 0.29 117 0.87 0.24 -1.05** -0.05*


Percentage ownership from shares 417 0.07 0.03 303 0.07 0.04 114 0.06 0.03 -0.01 -0.01


403 17,106.77 10,380.20 285 18,674.71 13,702.49 118 13,913.53 6,877.12 -4,761.18** -6,825.37**



403 -0.10 0.01 285 0.00 0.10 118 -0.30 -0.18 -0.30*** -0.28***

Dollar equity risk (equity risk exposure($)) 403 -169.19 -281.36 285 633.75 1,105.17 118 -1,889.78 -1,319.10 -2,523.53*** -2,424.27***


276 277




Panel C: Non-S&P 1,500 banks


Total compensation 1,241 808.19 600.62 907 812.43 578.54 334 798.85 649.54 -13.58 71.00*

Salary 1,239 427.90 399.34 905 434.03 397.09 334 414.40 404.89 -19.63* 7.80

Cash bonus 1,131 260.81 149.11 840 275.63 148.68 291 225.65 150.67 -49.98** 2.00

Dollar value of annual stock grant 260 148.88 61.61 79 107.92 0.00 181 165.08 77.45 57.16** 77.45***

Dollar value of annual option grant 302 80.15 33.68 96 69.14 14.43 206 85.01 41.00 15.87 26.57**

Other compensation 1,184 59.77 36.10 857 63.90 34.75 327 50.93 38.32 -12.97*** 3.56

Cash bonus/salary 1,050 0.60 0.45 784 0.60 0.45 266 0.60 0.46 0.00 0.01


Value of total equity portfolio 1,239 6,470.53 1,918.00 905 7,119.62 2,083.95 334 5,035.57 1,682.25 -2,084.05*** -401.70

Value of shares 1,232 1,802.03 516.03 899 1,933.17 564.07 333 1,512.13 389.88 -421.04** -174.19**


755 2,095.39 620.97 721 2,168.32 649.94 34 919.87 298.01 -1,248.45*** -351.93


703 475.64 96.00 669 503.69 113.65 34 57.34 0.42 -446.35*** -113.23***

Value of unvested restricted stock 455 1,635.49 130.08 293 2,583.70 127.11 162 459.23 132.34 -2,124.47*** 5.23


1,239 8.78 2.78 905 9.61 3.19 334 6.94 2.25 -2.66*** -0.94***

Value of shares/salary 1,230 4.33 1.54 897 4.60 1.68 333 3.73 1.04 -0.87** -0.64***


Percentage ownership from shares 1,206 0.09 0.06 883 0.09 0.07 323 0.08 0.06 -0.01** -0.01**


1,083 7,108.90 3,009.46 763 8,123.49 3,761.03 320 4,996.28 2,210.44 -3,127.21*** -1,550.59***



1,083 -0.20 -0.11 763 -0.15 -0.07 320 -0.29 -0.22 -0.14*** -0.15***

Dollar equity risk (equity risk exposure($)) 1,083 -1,003.20 -463.15 763 -946.63 -501.03 320 -1,124.37 -433.10 -177.74 67.94


278 279


Panels B and C of Table 2 present the results for S&P 1,500 banks and non-S&P 1,500 banks, respectively. We found that the magnitude of increase in dollar value of stock grants for S&P 1,500 banks was greater than non-S&P 1,500 banks, but S&P 1,500 banks also significantly reduced cash bonuses to CEOs after the financial crisis. The changes in other components of CEO incentives were almost the same for the two groups of banks as reported in panels B and C of Table 2, but the effect for S&P 1,500 banks was much more significant.9

4.2 Univariate Analysis 4.2.1 The Operational Differences for Different Banks

We compared the difference in bank operational activities, such as loan commitments, deposits, and other business activities, between the two groups of sample banks. Table 3 shows that S&P 1,500 banks on average had significantly higher liquidity ratios, particularly after the financial crisis. Compared to non-S&P 1,500 banks, S&P 1,500 banks had a larger proportion of loan commitments and earned larger proportions of their income from non-traditional banking activities. It seems there was little difference in the ratio of transaction deposits to total deposits between these two groups.

Table 3 Univariate Analysis: Banksʼ Type and Business Operation ActivitiesThis table presents the univariate analysis on the relations between bank types and different bank business activities from 1992 to 2012. Business activities include loan commitment, deposits, and non-interest income activities. In each panel, we compared the difference in each business activity for different types of banks (S&P 1,500 banks vs. non-S&P 1,500 banks) for the different research periods. We divided our research period into two different sub-periods. The pre-financial crisis period is years 1992 to 2006 (sub-period B). Years 2007 to 2012 (sub-period C) is the post-crisis period. S&P 1,500 banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean were assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Bank typesPeriod A:

1992-2012Sub-period B:

1992-2006Sub-period C:

2007-2012

Panel A: Liquidity ratio (%)

S&P 1,500 banks (1) 16.08 16.45 15.15

(24.18)*** (19.59)*** (15.00)***

Non-S&P 1,500 banks (2) 14.39 15.27 12.16

(37.68)*** (31.83)*** (21.33)***

Difference (1) - (2) 1.69 1.18 3.00

(2.20)** (1.22) (2.58)***

Panel B: Loan commitment (%)

S&P 1,500 banks (1) 20.74 20.98 20.13

(26.79)*** (21.85)*** (15.92)***

Non-S&P 1,500 banks (2) 12.67 12.75 12.48

(40.18)*** (33.30)*** (22.71)***

Difference (1) - (2) 8.07 8.24 7.65

(9.65)*** (7.97)*** (5.55)***

Panel C: Deposits base (%)

S&P 1,500 banks (1) 7.30 7.56 6.65

(23.89)*** (19.71)*** (14.07)***

Non-S&P 1,500 banks (2) 6.86 7.34 5.66

(37.15)*** (31.80)*** (20.17)***

Difference (1) - (2) 0.44 0.23 0.98

(1.22) (0.50) (1.79)*

Panel D: Non-interest income (%)

S&P 1,500 banks (1) 53.38 53.94 52.00

(85.88)*** (71.17)*** (48.79)***

Non-S&P 1,500 banks (2) 49.08 49.63 47.70

(165.83)*** (143.86)*** (83.96)***

Difference (1) - (2) 4.30 4.32 4.30

(6.25)*** (5.18)*** (3.56)***

9 The results were generally quantitatively similar to the ones reported in Table 2 if we compare the difference in mean (median values) of CEOs compensation, equity portfolio, equity incentives, and equity risk exposure for the sample banks between the period before the financial crisis (1992 to 2006) and the period after the financial crisis (2009-2012).


280 281


4.2.2 CEO Incentives and Bank Liquidity HoldingsTable 4 shows the results of the difference in the bank liquidity between different

levels of CEO incentives for the whole sample and sub-sample banks, non-S&P 1,500 banks, and S&P 1,500 banks across different sub-periods, respectively. Panel A of Table 4 shows the results for the whole sample, and panels B and C report the results for the subsample. The average liquidity ratio of the whole sample with high CEO cash bonus was 16.06% and 13.84% for banks with low CEO cash bonus during the whole research period, and the difference in the liquidity ratio for these two groups was significant at the 1% level. Results of the sub-period analyses from 1992 to 2006 were consistent with these findings. We found that there was no difference in the average liquidity ratio for banks with different levels of CEO equity incentive for the whole sample. Univariate analysis indicated that CEOs with larger cash bonuses tended to have their banks hold higher liquidity ratios, while equity-based CEO incentives did not motivate them to have their banks hold higher levels of liquidity. These results support the argument that equity-based compensation provokes CEO risk attitudes toward risky investments and thus have lower levels of bank liquidity (Houston and James, 1995; John and Qian, 2003).

Although there was no significant effect for banks with different levels of CEO equity ownership to the bank liquidity holdings for the whole sample period, we found that CEOs equity incentives, in terms of dollar gains or percentage benefit from change in stock price, had different impacts on the bank liquidity holding policy for different types of banks in the US. Banks in the S&P 1,500 with high CEO equity incentives usually maintained higher levels of bank liquidity, but non-S&P 1,500 banks with high CEO equity incentives maintained significantly lower liquidity ratios than those with low CEO equity incentives during the whole research period (see panels B and C of Table 4). The results indicate that CEO equity incentives affected the liquidity management of commercial banks, but the effect to liquidity holdings was different for S&P 1,500 and non-S&P 1,500 banks.

We also examined the association of CEO equity risk exposure with bank liquidity level. The whole sample results (see panel A) show that banks with high CEO equity risk exposure held significantly higher liquidity ratios after the financial crisis, but this tendency did not exist in other periods.

Table 4 Univariate Analysis: Average Liquidity Across Different Levels of CEO Incentives

This table presents the univariate analysis on the relations between CEO incentives and bank liquidity (%) from 1992 to 2012. We divided our research period into two different sub-periods and compared the difference in ratio of bank liquidity of sample banks under the level of CEO incentives for the different research periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post crisis period. Panels A to C present the results for the whole sample, S&P 1,500 banks, and non-

S&P 1,500 banks, respectively. S&P 1,500 banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean were assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels.

Level of CEO Incentives

1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity incentive (%) 4. CEO equity risk exposure ($) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-20121992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

Panel A: All banks

High CEO Incentives 16.06 16.65 14.48 14.41 15.21 12.65 14.85 15.95 11.88 15.11 15.45 14.32 15.23 15.54 14.49

(34.82)*** (29.29)*** (19.58)*** (31.65)*** (26.50)*** (17.71)*** (28.86)*** (24.93)*** (15.50)*** (29.27)*** (23.33)*** (18.90)*** (29.76)*** (23.66)*** (19.51)***

Low CEO Incentives 13.84 13.98 13.49 14.96 15.56 13.66 14.82 15.13 14.10 14.31 15.33 12.20 14.18 15.24 12.02

(26.26)*** (21.23)*** (16.53)*** (30.29)*** (24.13)*** (19.60)*** (36.47)*** (29.43)*** (22.26)*** (32.62)*** (27.23)*** (18.59)*** (32.23)*** (27.06)*** (18.06)***

Difference (High-Low) 2.22 2.67 0.99 -0.55 -0.35 -1.01 0.03 0.81 -2.21 0.80 0.12 2.12 1.05 0.30 2.47

(3.16)*** (3.07)*** (0.90) (-0.82) (-0.41) (-1.02) (0.05) (0.99) (-2.23)** (1.18) (0.14) (2.12)** (1.55) (0.35) (2.48)**


282 283


4.2.3 CEO Incentives and CEO Risk AttitudesThe analyses just reported imply that different levels of CEO incentives affect bank

liquidity holdings. In this section, we further examine whether different CEO incentives affect the CEO’s decision of business policies and then influence the bank liquidity. Previous studies suggested CEO compensation serves as a mechanism to enhance bank performance especially when market competition increases (Hubbard and Palia, 1995). Houston and James (1995) found that CEO’s equity-based compensation is positively related to bank chartered value, but does not significantly promote risk taking in a bank. However, more and more studies provide supporting evidence that different CEO compensation schemes affects risk taking incentives, and conduct different investment policies. For example, Coles et al. (2006) find that higher proportion of CEO compensation sensitive to stock return volatility will induce a CEO to implement riskier policy choices. DeYoung and Rice (2004) find that well-managed banks gradually involve more into noninterest activities. Chen, Steiner, and Whyte (2006) also find that using option-based compensation induces CEO risk taking behaviors to explore the expanded investment opportunity set after the deregulation. Combining those studies, we would

expect to see that CEO incentives may affect their risk attitudes on business policies and then influence the level of bank liquidity.

Our study uses five measures for CEO incentives. These five measures capture three categories of CEO incentives. CEO cash bonus is used to describe short-term incentive. Two variables are used to capture CEO equity incentives: dollar gains of CEO portfolio from +1% change in stock price (equity incentives ($)) and percentage ownership (equity incentive (%)). The third category is CEO’s equity risk exposure, which is measured by dollar equity risk sensitivity (equity risk exposure ($)) and percentage equity risk sensitivity (equity risk exposure (%)).

Among these measures, stock ownership (equity incentive (%)) is usually known as the direct link between shareholders and CEO wealth (Murphy, 1999). Banks with higher CEO equity ownership indicates those with better alignment of CEO’s interests with those of the shareholders. To increase the profit, banks with higher CEO equity ownership tend to conduct risky projects instead of hoarding the liquidity. In addition, we also measure the dollar value of CEO equity incentives by including stock and option value (equity incentive ($)). As Core and Guay (1999) suggest, including stock option in equity



1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-20121992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012



(21.67)*** (17.99)*** (12.74)*** (20.98)*** (15.99)*** (14.30)*** (13.29)*** (11.55)*** (6.95)*** (16.15)*** (14.12)*** (7.92)*** (17.45)*** (13.97)*** (11.31)***


(8.83)*** (6.30)*** (6.72)*** (12.29)*** (10.74)*** (6.94)*** (24.64)*** (20.07)*** (14.22)*** (18.80)*** (13.45)*** (13.74)*** (17.62)*** (14.10)*** (10.89)***

Difference (High-Low) 4.75 5.74 2.60 3.85 2.93 6.93 5.35 6.32 2.26 2.13 2.01 1.79 2.71 1.54 4.89

(2.93)*** (2.75)*** (1.06) (2.79)*** (1.67)* (3.67)*** (3.37)*** (3.31)*** (0.86) (1.60) (1.20) (0.77) (2.10)** (0.93) (2.50)**



(27.40)*** (23.22)*** (15.11)*** (24.36)*** (21.45)*** (12.24)*** (26.06)*** (22.43)*** (14.12)*** (24.55)*** (18.66)*** (17.35)*** (24.26)*** (19.13)*** (16.21)***


(24.74)*** (20.32)*** (15.06)*** (27.71)*** (21.62)*** (18.53)*** (28.45)*** (23.18)*** (17.30)*** (27.12)*** (23.74)*** (13.75)*** (27.42)*** (23.34)*** (14.82)***

Difference (High-Low) 1.29 1.86 -0.06 -2.45 -1.76 -4.29 -1.24 -0.67 -2.84 0.24 -0.75 2.67 0.27 -0.34 1.54

(1.61) (1.88)* (-0.05) (-3.22)*** (-1.80)* (-3.84)*** (-1.66)* (-0.71) (-2.55)** (0.31) (-0.74) (2.35)** (0.34) (-0.34) (1.35)


284 285


incentive portfolios makes it easier to measure the CEO equity incentives. CEOs with high stock ownership are expected to make more loans, noninterest activities, or risky projects to generate higher profit than banks with low CEO equity.

The measure of CEO equity risk exposure links CEO equity wealth to the variation of the stock market. CEO equity wealth usually composes of stocks and options. Greater sensitivity of his wealth to the volatility of his firm’s stock return would increase a CEO’s incentive to take risks because it is expected to increase a CEO’s equity wealth when these options are in the money (DeYoung, Peng, and Yan, 2013). Therefore, we also expect that CEOs with higher equity risk exposure tend to conduct riskier projects than those with lower equity risk exposure.

We selected three bank policies, such as loan commitments, deposits, and non-interest income activities to test our conjecture. The results are shown in Tables 5 to 7. Panel A of Table 5 shows that the level of CEO incentives significantly affected the magnitude of banks’ loan commitments to borrowers.

In particular, we found that banks managed by CEOs who received large cash bonuses and equity value incentives (CEO equity incentive ($)) tended to have higher ratios of loan commitments than CEOs receiving lower levels of these incentives, which is consistent with our conjecture. However, when CEO incentives were measured with percentage of equity incentive, we found the association between equity incentive and loan commitment became significantly negative for the whole sample during the research period. This pattern was consistent and significant across all the sub-periods. Subsample analyses, the results of which are shown in panels B and C, indicate that the significant relation between equity incentives and liquidity policies existed for both types of banks, but the effect on S&P 1,500 banks was particularly strong.

The CEO equity incentives ($) and CEO equity incentives (%) significantly affected loan commitment in the opposite direction, indicating that CEO equity incentives played an important role in determining loan commitment activities. The inconsistent sign of CEO equity incentives also implies that CEO equity income measured by the dollar amount serves as a proportion of CEO compensation from stock and option portfolio and higher compensation leads to higher incentives to make more loan commitment. Valuing CEO equity incentive by percentage shares owned by a CEO does not take into

consideration the value effect to the CEO’s wealth portfolio, so the results are less sensitive to changes in the value of stock prices Therefore, decomposing CEO incentives helped us better understand how they influenced the bank lending policies. Banks with different levels of CEOs equity risk exposure did not have significantly different loan commitments.


286 287


Table 5 Univariate Analysis: Average Loan Commitment Across Different Level of CEO Incentives

This table presents the univariate analysis on the relations between CEO incentives and Loan Commitment (%) from 1992 to 2012. We divided our research period into two different sub-periods and compared the difference in the ratio of loan commitment of sample banks under the level of CEO incentives for the different research periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. Panels A to C present the results for the whole sample,

S&P 1,500 banks, and non-S&P 1,500 banks, respectively. S&P 1,500 banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean were assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.



1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-20121992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

Panel A: All banks

High CEO Incentives

19.17 19.54 18.19 16.52 17.11 15.25 11.91 12.13 11.28 15.35 15.91 14.04 15.71 16.01 15.00

(35.12)*** (29.35)*** (19.67)*** (30.60)*** (25.55)*** (16.94)*** (30.88)*** (26.50)*** (15.88)*** (29.12)*** (23.58)*** (18.14)*** (29.83)*** (23.93)*** (18.63)***

Low CEO Incentives

11.23 10.38 13.55 13.58 13.56 13.63 17.36 17.57 16.89 14.72 14.70 14.78 14.36 14.56 13.93

(28.77)*** (23.31)*** (17.43)*** (32.28)*** (25.41)*** (20.93)*** (34.98)*** (28.02)*** (21.64)*** (33.00)*** (27.19)*** (18.65)*** (32.57)*** (27.08)*** (18.08)***

Difference(High-Low)

7.94 9.16 4.63 2.94 3.55 1.61 -5.46 -5.44 -5.61 0.63 1.22 -0.74 1.35 1.45 1.08

(11.83)*** (11.43)*** (3.84)*** (4.29)*** (4.14)*** (1.45) (-8.68)*** (-7.00)*** (-5.32)*** (0.91) (1.41) (-0.67) (1.97)** (1.69)* (0.97)


High CEO Incentives

24.91 25.15 24.17 23.48 23.65 23.16 13.23 14.09 10.27 20.43 21.52 16.36 20.46 20.93 19.16

(25.40)*** (21.58)*** (13.49)*** (23.68)*** (18.17)*** (15.66)*** (13.30)*** (11.60)*** (7.67)*** (16.46)*** (14.84)*** (7.44)*** (17.64)*** (14.63)*** (10.25)***

Low CEO Incentives

10.65 8.37 14.88 16.32 17.85 11.43 25.77 26.37 24.53 21.73 21.47 22.10 21.87 22.34 21.06

(10.21)*** (6.98)*** (8.37)*** (12.83)*** (11.42)*** (7.08)*** (25.78)*** (20.40)*** (16.26)*** (21.40)*** (15.64)*** (14.69)*** (20.51)*** (16.38)*** (12.28)***


14.25 16.79 9.29 7.16 5.80 11.73 -12.54 -12.28 -14.26 -1.30 0.05 -5.74 -1.41 -1.41 -1.89

(9.96)*** (10.04)*** (3.68)*** (4.44)*** (2.85)*** (5.36)*** (-8.89)*** (-6.93)*** (-7.07)*** (-0.81) (0.03) (-2.15)** (-0.90) (-0.71) (-0.75)


High CEO Incentives

15.46 15.72 14.81 12.59 13.66 10.09 11.60 11.65 11.47 13.33 13.27 13.45 13.60 13.67 13.43

(27.31)*** (22.23)*** (16.46)*** (22.85)*** (20.02)*** (11.44)*** (27.95)*** (24.04)*** (14.23)*** (25.66)*** (19.74)*** (16.97)*** (25.53)*** (20.10)*** (16.28)***

Low CEO Incentives

11.33 10.67 13.26 12.99 12.53 13.99 13.42 13.63 12.90 12.38 12.82 11.30 12.15 12.47 11.42

(26.89)*** (22.30)*** (15.33)*** (30.30)*** (23.47)*** (19.75)*** (28.68)*** (22.92)*** (18.37)*** (27.67)*** (23.73)*** (14.29)*** (27.96)*** (23.63)*** (14.97)***


4.13 5.05 1.56 -0.40 1.13 -3.90 -1.81 -1.98 -1.43 0.95 0.45 2.15 1.45 1.20 2.01

(5.85)*** (5.92)*** (1.25) (-0.58) (1.30) (-3.45)*** (-2.90)*** (-2.58)*** (-1.34) (1.38) (0.52) (1.92)* (2.10)** (1.40) (1.79)*


288 289


We then investigated the association between CEO incentives and average deposit ratio for the different groups of commercial banks. Panel A of Table 6 shows that banks with higher levels of CEO cash bonuses usually had higher deposit ratios. Banks with

higher CEO equity incentives had lower proportions of deposits than banks with lower CEO equity incentives. This phenomenon existed in both subsamples as shown in panels B and C of Table 6.

Table 6 Univariate Analysis: Average Deposit Base Across Different Level of CEO Incentives

This table presents the univariate analysis on the relations between CEO incentives and average deposit (%) from 1992 to 2012. We divided our research period into two different sub-periods and compared the difference in the ratio of average deposit of sample banks under the level of CEO incentives for the different research periods. The pre-financial crisis period is years 1992 to 2006 and years 2007 to 2012 is the post-crisis period. Panels A to C present the results for the whole

sample, S&P 1,500 banks, and non-S&P 1,500 banks, respectively. An S&P 1,500 bank is a bank included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean are assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Level of CEO Incentives 1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity incentive (%) 4. CEO equity risk exposure ($) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

Panel A: All banks


(30.75)*** (26.35)*** (16.62)*** (28.87)*** (24.09)*** (16.16)*** (28.26)*** (24.55)*** (15.18)*** (28.35)*** (23.21)*** (16.58)*** (28.85)*** (23.72)*** (16.75)***


(27.38)*** (22.70)*** (15.82)*** (30.60)*** (25.63)*** (17.68)*** (33.50)*** (28.01)*** (18.85)*** (31.10)*** (26.40)*** (17.77)*** (30.62)*** (25.93)*** (17.48)***

Difference(High-Low) 0.89 1.23 -0.01 -0.85 -1.04 -0.38 -1.06 -0.94 -1.60 0.42 -0.11 1.52 0.36 -0.08 1.26

(2.56)** (2.88)*** (-0.02) (-2.62)*** (-2.51)** (-0.78) (-3.36)*** (-2.38)** (-3.35)*** (1.29) (-0.25) (3.04)*** (1.10) (-0.18) (2.55)**



(21.35)*** (18.32)*** (11.23)*** (18.92)*** (14.51)*** (12.75)*** (10.50)*** (9.32)*** (4.97)*** (15.19)*** (13.59)*** (6.77)*** (16.02)*** (13.38)*** (8.97)***


(8.78)*** (6.32)*** (6.51)*** (13.33)*** (11.99)*** (6.26)*** (23.10)*** (18.77)*** (13.78)*** (18.46)*** (13.41)*** (13.41)*** (17.69)*** (13.87)*** (11.76)***

Difference(High-Low) 3.59 4.04 2.46 0.41 0.05 1.83 -1.93 -1.93 -2.41 0.70 0.57 0.43 0.29 -0.12 0.88

(5.39)*** (4.70)*** (2.39)** (0.63) (0.06) (1.81)* (-2.82)*** (-2.32)** (-2.13)** (1.11) (0.72) (0.38) (0.47) (-0.15) (0.92)



(22.45)*** (19.13)*** (12.54)*** (22.12)*** (19.43)*** (10.89)*** (26.48)*** (22.90)*** (14.54)*** (24.00)*** (18.85)*** (15.19)*** (24.02)*** (19.59)*** (14.13)***


(26.14)*** (21.98)*** (14.52)*** (27.56)*** (22.71)*** (16.54)*** (25.37)*** (21.54)*** (13.71)*** (25.57)*** (22.85)*** (12.88)*** (25.56)*** (22.16)*** (13.72)***

Difference(High-Low) 0.07 0.50 -0.96 -1.49 -1.55 -1.43 -0.70 -0.56 -1.18 0.30 -0.42 2.09 0.32 -0.13 1.38

(0.17) (0.99) (-1.48) (-3.97)*** (-3.28)*** (-2.47)** (-1.89)* (-1.22) (-2.09)** (0.77) (-0.85) (3.69)*** (0.84) (-0.27) (2.39)**


290 291


We also investigated the association between CEO incentives and non-interest income. Panel A of Table 7 shows that different levels of CEO cash bonus and CEO equity incentives were significantly associated with the level of non-interest income earned. The

effect was particularly strong for the period prior to the financial crisis. The results of the subsample analysis shown in panels B and C of Table 7 were similar to the results in panel A of Table 7.

Table 7 Univariate Analysis: Average Non-Interest Income Across Different Level of CEO Incentives

This table presents the univariate analysis on the relations between CEO incentives and non-interest income (%) from 1992 to 2012. We divided our research period into two different sub-periods and compared the difference in ratio of non-interest income of sample banks under the level of CEO incentives for the different research periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. Panels A to C present the results for the whole sample,

S&P 1,500 banks, and non-S&P 1,500 banks, respectively. S&P 1,500 banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. Differences in mean were assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Level of CEO Incentives 1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity incentive (%) 4. CEO equity risk exposure ($) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-

2012 1992-2012 1992-2006 2007-2012

Panel A: All banks


(110.09)*** (96.68)*** (54.38)*** (111.86)*** (97.20)*** (57.75)*** (126.03)*** (108.66)*** (64.35)*** (108.31)*** (89.70)*** (62.54)*** (111.24)*** (91.83)*** (64.05)***


(126.79)*** (109.01)*** (64.66)*** (128.85)*** (103.06)*** (79.50)*** (132.45)*** (113.85)*** (69.33)*** (131.74)*** (111.83)*** (70.24)*** (129.19)*** (110.22)*** (68.24)***

Difference(High-Low) 2.86 3.60 0.90 1.10 1.93 -0.66 -3.50 -3.80 -3.06 -0.48 0.27 -2.25 0.36 0.80 -0.72

(4.71)*** (5.10)*** (0.76) (1.87)* (2.70)*** (-0.63) (-6.39)*** (-5.90)*** (-2.97)*** (-0.80) (0.38) (-2.17)** (0.60) (1.13) (-0.69)



(65.10)*** (55.37)*** (34.57)*** (65.22)*** (51.75)*** (39.84)*** (45.18)*** (38.22)*** (25.55)*** (52.71)*** (47.32)*** (23.97)*** (56.71)*** (48.90)*** (29.09)***


(52.64)*** (44.17)*** (28.74)*** (48.52)*** (40.05)*** (32.56)*** (75.35)*** (62.22)*** (42.90)*** (63.82)*** (46.37)*** (44.42)*** (60.85)*** (44.95)*** (42.95)***

Difference(High-Low) 4.36 4.47 3.68 1.89 1.60 3.46 -6.31 -6.71 -6.04 0.82 1.94 -2.98 1.95 3.01 -0.76

(3.41)*** (2.94)*** (1.58) (1.40) (0.95) (1.72)* (-4.78)*** (-4.22)*** (-2.67)*** (0.62) (1.20) (-1.24) (1.52) (1.87)* (-0.35)



(94.87)*** (86.47)*** (44.41)*** (95.38)*** (87.39)*** (45.13)*** (120.41)*** (105.55)*** (58.93)*** (100.36)*** (81.26)*** (59.40)*** (102.28)*** (83.02)*** (60.60)***


(115.94)*** (100.36)*** (57.93)*** (121.54)*** (97.80)*** (72.61)*** (114.41)*** (100.46)*** (57.31)*** (117.35)*** (104.21)*** (56.44)*** (115.16)*** (102.60)*** (55.92)***

Difference(High-Low) 1.04 1.98 -1.21 -0.24 1.17 -3.49 -1.94 -2.30 -1.19 -1.16 -0.97 -1.36 -0.71 -0.64 -0.79

(1.56) (2.60)*** (-0.90) (-0.37) (1.54) (-2.88)*** (-3.27)*** (-3.36)*** (-1.03) (-1.82)* (-1.27) (-1.16) (-1.11) (-0.84) (-0.68)


292 293


Combining the results from Tables 5 to 7, we found that CEO incentives from different perspectives affected banks’ liquidity and business policies.10 Specifically, banks offering their CEOs larger cash bonuses tended to make larger loan commitments, take more deposits, and conduct more non-interest earning business activities than banks that offered lower CEO cash bonuses. Corresponding business policies meant that banks tended to maintain higher liquidity ratios (see Table 4). This linkage was particularly significant before the financial crisis. CEO equity incentive was another important factor influencing bank business policies and liquidity holdings. Banks with different levels of CEO equity value or shares affected loan commitments, deposit-taking, and non-interest earning business activities.11 Because the value effect or shareholding effect of those business policies were not in the same direction (see Tables 5 to 7), this might be the cause of the insignificant association between CEO equity incentives and liquidity holdings of the sample banks.4.2.4 CEO Incentives and Bank Performance

We also investigated whether different CEO incentives were associated with bank performance because banks with different CEO incentives conducted different business activities, as reported in Tables 5 to 7. If the level of CEO incentives results in banks choosing different types of business activities, we would expect that bank performance would also be affected. We computed the return on assets and return on equity for each bank to proxy bank performance. The results are shown in Panels A and B of Table 8. Panel A indicates that both S&P 1,500 banks and non-S&P 1,500 banks usually had higher ROA performance if their CEOs had relatively higher cash bonuses, equity incentives, or CEO equity risk exposures. The results from Panel B are quite consistent with those

reported in panel A. Our results generally indicate that CEO incentives significantly affected bank performance. Banks with higher CEO incentives, measured by cash bonuses, equity dollar incentives, and equity risk exposure, tended to have higher operating performance. This pattern existed for both S&P 1,500 and non-S&P 1,500 banks. We also observed that the effect of cash bonus incentives and equity incentives on bank performance became less significant after the financial crisis. Our results support Fahlenbrach and Stulz’s (2011) idea that higher CEO incentives encourage banks to take riskier investment projects to achieve better performance. The incentive schemes worked in normal economic situations, but became less significant when banks encountered major and sudden changes in the business environment.

10 To save the space, we do not report the multivariate regression results between CEO incentives and different bank business policies. The results are qualitatively consistent with Tables 5 to 7 and available upon request. In addition, we also conduct 2SLS analyses to examine the relation between CEO incentives and bank business policies and bank liquidity. The results, although not reported, generally show that the higher CEO incentives tend to keep higher level of liquidity ratio as they receive higher deposits, make higher loan commitment, and noninterest income. This relation is more significantly in S&P1,500 banks, but weak in non S&P 1,500 banks. The overall results are consistent with the main results of the text.

11 We appreciate that anonymous reviewer raises the possibility about the simultaneous decision among CEO incentives, bank business policies, and liquidity policy. We conduct the simultaneous regression among these three factors and results are still hold. To save the space, we do not report the results but available upon request.


294 295


Table 8 Univariate Analysis: Average Bank Performance Across Different Level of CEO Incentives

This table presents the univariate analysis on the relations between CEO incentives and bank performance, return on assets (%) and return on equity (%) from 1992 to 2012. We divided our research period into two different sub-periods and compared the difference in bank performance under the level of CEO incentives for the different research periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. Panels A present the results of return on assets for the whole sample, S&P 1,500 banks, and non-S&P 1,500 banks, respectively. Panel B

presents the results of return on assets for the whole sample, S&P 1,500 banks, and non-S&P 1,500 banks, respectively. S&P 1,500 banks are banks that are included in the S&P 1,500 index. All variables are as defined in Appendix and winsorized at the 5th and 95th percentiles. Differences in mean were assessed using a t-test. The number of observations varies because of data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Level of CEO

Incentives1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity incentive (%) 4. CEO equity risk exposure ($) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-20062007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

Panel A: Return on asset

Panel A.1: All banks

High CEO Incentives

1.00 1.23 0.37 0.83 1.15 0.15 0.92 0.99 0.77 0.89 1.14 0.29 0.94 1.14 0.47

(26.74)*** (53.93)*** (3.39)*** (20.85)*** (50.53)*** (1.48) (112.13)*** (108.21)*** (52.56)*** (23.51)*** (45.98)*** (2.92)*** (29.13)*** (48.53)*** (5.65)***

Low CEO Incentives

0.78 1.00 0.17 0.70 1.03 -0.08 0.93 1.00 0.77 0.65 1.04 -0.18 0.59 1.03 -0.36

(20.95)*** (40.25)*** (1.57) (15.00)*** (37.90)*** (-0.65) (106.75)*** (102.85)*** (50.88)*** (13.80)*** (40.64)*** (-1.49) (11.59)*** (38.64)*** (-2.84)***

Difference (High-Low)

0.22 0.23 0.20 0.14 0.11 0.23 -0.01 -0.01 0.00 0.24 0.10 0.47 0.35 0.11 0.84

(4.17)*** (6.86)*** (1.31) (2.22)** (3.19)*** (1.44) (-0.67) (-0.97) (-0.08)* (3.91)*** (2.85)*** (3.01)*** (5.84)*** (3.07)*** (5.47)***

Panel A.2: S&P 1,500 banks

High CEO Incentives

1.08 1.36 0.27 0.86 1.31 0.02 0.98 1.05 0.82 1.09 1.31 0.25 1.12 1.30 0.64

(16.47)*** (45.10)*** (1.23) (10.63)*** (39.00)*** (0.11) (55.68)*** (56.87)*** (25.85)*** (15.67)*** (36.75)*** (0.95) (26.67)*** (37.12)*** (6.41)***

Low CEO Incentives

0.67 1.07 -0.06 0.83 1.25 -0.54 0.98 1.09 0.78 0.61 1.25 -0.32 0.49 1.27 -0.86

(5.47)*** (24.96)*** (-0.21) (6.86)*** (33.85)*** (-1.34) (57.71)*** (61.08)*** (28.39)*** (5.34)*** (36.86)*** (-1.36) (3.51)*** (36.46)*** (-2.77)***


0.41 0.28 0.33 0.04 0.05 0.56 -0.01 -0.04 0.04 0.48 0.06 0.57 0.63 0.03 1.51

(2.94)*** (5.44)*** (0.89) (0.25) (1.09) (1.25) (-0.22) (-1.50) (0.94) (3.63)*** (1.28) (1.61) (4.28)*** (0.53) (4.61)***

Panel A.3: Non-S&P 1,500 banks

High CEO Incentives

0.94 1.15 0.43 0.81 1.06 0.23 0.90 0.97 0.76 0.81 1.06 0.30 0.86 1.07 0.41

(21.34)*** (36.34)*** (3.59)*** (19.16)*** (37.02)*** (2.14)** (98.36)*** (85.99)*** (42.20)*** (18.16)*** (33.74)*** (2.84)*** (20.36)*** (36.01)*** (3.76)***

Low CEO Incentives

0.79 0.99 0.22 0.67 0.98 -0.01 0.91 0.97 0.75 0.66 0.98 -0.11 0.62 0.97 -0.19

(20.77)*** (35.76)*** (1.95)* (13.34)*** (30.59)*** (-0.05) (90.48)*** (94.36)*** (46.00)*** (13.25)*** (32.01)*** (-0.82) (12.04)*** (30.45)*** (-1.43)


0.15 0.16 0.21 0.15 0.08 0.24 0.00 0.00 0.01 0.14 0.08 0.42 0.24 0.10 0.60

(2.49)** (3.73)*** (1.25) (2.23)** (1.89)* (1.43) (-0.14) (0.16) (-0.42) (2.11)** (1.79)* (2.38)** (3.66)*** (2.29)** (3.49)***


296 297


Level of CEO

Incentives1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity incentive (%) 4. CEO equity risk exposure ($) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-20062007-2012

1992-2012

1992-2006

2007-2012

1992-2012

1992-2006

2007-2012

Panel B: Return on equity

Panel B.1: All banks

High CEO Incentives

10.60 14.29 0.81 8.59 13.28 -1.52 10.24 12.07 6.79 9.42 13.16 0.69 10.24 13.24 3.31

(11.68)*** (51.28)*** (0.26) (10.79)*** (43.89)*** (-0.66) (88.44)*** (101.91)*** (38.02)*** (14.87)*** (42.80)*** (0.37) (18.93)*** (48.27)*** (2.10)**

Low CEO Incentives

7.37 11.38 -3.56 5.09 11.69 -10.07 10.22 12.33 6.32 4.45 11.82 -11.24 3.49 11.69 -14.11

(6.65)*** (50.05)*** (-0.90) (3.61)*** (37.51)*** (-2.28)** (83.94)*** (101.73)*** (35.03)*** (3.09)*** (38.34)*** (-2.62)*** (2.31)** (34.70)*** (-3.15)***


3.23 2.90 4.37 3.51 1.59 8.55 0.01 -0.26 0.47 4.97 1.34 11.92 6.75 1.55 17.42

(2.26)** (8.07)*** (0.86) (2.17)** (3.66)*** (1.72)* (0.08) (-1.51) (1.85)* (3.16)*** (3.08)*** (2.55)** (4.21)*** (3.56)*** (3.67)***

Panel B.2: S&P 1,500 banks

High CEO Incentives

10.74 15.74 -4.18 7.88 14.99 -5.51 11.31 12.36 6.97 11.93 15.01 0.43 12.38 14.73 5.99

(5.23)*** (45.54)*** (-0.53) (4.10)*** (39.02)*** (-1.06) (43.44)*** (46.99)*** (19.55)*** (13.31)*** (36.16)*** (0.13) (26.37)*** (36.61)*** (6.38)***

Low CEO Incentives

5.30 11.09 -5.40 4.77 13.68 -23.73 11.15 12.75 5.92 1.63 13.80 -15.83 -0.43 14.15 -25.88

(2.39)** (19.28)*** (-0.92) (1.12)*** (25.98)*** (-1.40) (46.19)*** (57.05)*** (18.68)*** (0.44) (29.43)*** (-1.82)* (-0.10) (28.48)*** (-2.33)**


5.44 4.65 1.22 3.11 1.31 18.22 0.16 -0.39 1.05 10.30 1.21 16.26 12.81 0.58 31.87

(1.80)* (6.92)*** (0.12) (0.67) (2.02)** (1.03) (1.24) (-1.12) (2.20)** (2.69)*** (1.93)* (1.74)* (2.95)*** (0.91) (2.85)***

Panel B.3: Non-S&P 1,500 banks

High CEO Incentives

10.51 13.30 3.63 8.99 12.38 1.08 9.97 11.73 6.66 8.42 12.28 0.75 9.29 12.53 2.30

(15.26)*** (33.66)*** (1.77)* (14.64)*** (30.48)*** (0.67) (77.73)*** (88.62)*** (33.07)*** (10.44)*** (30.80)*** (0.35) (12.39)*** (35.78)*** (1.07)

Low CEO Incentives

7.71 11.43 -3.15 5.15 11.21 -7.88 9.84 11.69 6.26 5.40 11.27 -9.06 4.64 11.03 -9.98

(6.23)*** (46.31)*** (-0.67) (3.55)*** (31.05)*** (-1.81)* (70.81)*** (81.43)*** (29.86)*** (3.69)*** (30.70)*** (-1.88)* (3.12)*** (27.61)*** (-2.16)**


2.81 1.87 6.78 3.84 1.16 8.96 0.12 0.04 0.40 3.02 1.02 9.81 4.65 1.49 12.28

(1.98)** (4.02)*** (1.32) (2.44)** (2.14)** (1.93)* (0.66)* (0.18) (1.38) (1.81)* (1.87)* (1.86)* (2.79)*** (2.81)*** (2.41)**

4.3 Multiple Regression Analysis4.3.1 CEO Incentives and Bank Liquidity

Next, we used a multivariate framework to examine the relation between bank liquidity and CEO incentives. Table 9 contains the results for the whole sample and subsamples. The panels show the empirical results according to the different measures of CEO incentives. Panel A of Table 9 shows that CEO equity incentives (%) and CEO equity risk exposures significantly affected the level of bank liquidity at the 5% level

during the whole research period. The effect of CEO equity risk exposure on the level of liquidity holding became stronger after the financial crisis, indicating that banks tended to hold a higher proportion of liquidity as their CEOs equity portfolios were more sensitive to changes in stock return volatility after the financial crisis. Panels B and C further show that the significantly positive linkage between CEO incentives and bank liquidity holdings mainly existed in the S&P 1,500 banks.


298 299


Table 9 The Relation between Bank Liquidity and CEO IncentivesThis table presents the cross-sectional regression analyses between bank liquidity holdings and CEO incentives from 1992 to 2012. We divided our research period into two different sub-periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. All variables are as defined in the Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-

adjusted 2010 dollars. All regressions include firm and year dummies as control variables and standard errors were adjusted for heteroskedasticity and potential clustering of the residual at the firm level. The number of observations varies due to data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

Independent Variable

1. CEO cash bonus 2. CEO equity incentive ($) 3. CEO equity risk exposure ($) 4. CEO equity incentive (%) 5. CEO equity risk exposure (%)

1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Panel A: All banks

Constant 0.051 0.065 -0.044 0.049 0.064 -0.002 0.041 0.053 -0.008 0.027 0.035 -0.019 0.040 0.053 -0.009

(2.65)*** (2.84)*** (-1.18) (2.63)*** (2.77)*** (-0.07) (2.19)** (2.28)** (-0.24) (1.44) (1.58) (-0.57) (2.14)** (2.29)** (-0.29)

CashBonusi,t-1 -0.003 -0.005 0.003

(-0.56) (-0.73) (0.35)

EquityIncentive ($)i,t-1 -0.005 -0.008 -0.009

(-1.09) (-1.28) (-1.12)

EquityRiskExposure ($)i,t-1 0.009 0.009 0.015

(1.85)* (1.47) (1.95)*

EquityIncentive (%)i,t-1 0.011 0.014 0.0001

(2.36)** (2.48)** (0.01)

EquityRiskExposure (%)i,t-1 0.009 0.007 0.017

(1.86)* (1.20) (2.27)**

LoanCommitmenti,t-1 0.688 0.730 0.533 0.722 0.770 0.590 0.720 0.763 0.599 0.744 0.800 0.575 0.719 0.763 0.594

(20.62)*** (18.83)*** (8.67)*** (22.54)*** (20.08)*** (10.79)*** (22.65)*** (20.20)*** (10.97)*** (23.25)*** (21.34)*** (10.16)*** (22.64)*** (20.18)*** (10.92)***

DepositBasei,t-1 1.475 1.564 1.061 1.550 1.678 1.050 1.562 1.699 1.037 1.614 1.741 1.088 1.566 1.698 1.056

(20.35)*** (18.73)*** (7.86)*** (21.10)*** (19.30)*** (8.30)*** (21.43)*** (19.57)*** (8.26)*** (22.19)*** (20.41)*** (8.57)*** (21.46)*** (19.54)*** (8.51)***

LoanCommitmenti,t-1* DepositBasei,t-1

-5.619 -6.117 -3.543 -6.066 -6.714 -3.850 -6.101 -6.745 -3.914 -6.397 -7.055 -4.099 -6.111 -6.742 -3.951

(-17.25)*** (-16.36)*** (-5.73)*** (-18.40)*** (-17.27)*** (-6.54)*** (-18.50)*** (-17.31)*** (-6.73)*** (-18.88)*** (-17.79)*** (-6.86)*** (-18.51)*** (-17.28)*** (-6.81)***

BankCapitali,t-1 -0.309 -0.346 0.050 -0.301 -0.337 -0.034 -0.297 -0.323 -0.090 -0.248 -0.275 -0.017 -0.301 -0.325 -0.120

(-4.32)*** (-4.40)*** (0.28) (-3.78)*** (-3.70)*** (-0.21) (-3.73)*** (-3.56)*** (-0.56) (-3.22)*** (-3.16)*** (-0.11) (-3.78)*** (-3.58)*** (-0.73)

Share of Deposit Financingi,t-1 -0.008 -0.031 0.087 -0.005 -0.019 0.044 -0.004 -0.017 0.044 0.003 -0.012 0.063 -0.002 -0.017 0.049

(-0.35) (-1.18) (2.09)** (-0.24) (-0.76) (1.17) (-0.18) (-0.69) (1.17) (0.12) (-0.49) (1.64) (-0.11) (-0.66) (1.29)

BusinessCyclet-1 -0.026 0.097 -0.861 -0.132 -0.241 -0.976 -0.127 -0.219 -0.979 -0.001 -0.049 -0.910 -0.127 -0.224 -0.974

(-0.20) (0.38) (-3.88)*** (-1.09) (-0.90) (-4.84)*** (-1.05) (-0.81) (-4.88)*** (-0.01) (-0.21) (-4.45)*** (-1.05) (-0.83) (-4.87)***

Fixed effect Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes

N 1,202 928 274 1,238 915 323 1,238 915 323 1,360 1,036 324 1,238 915 323

R-square 0.426 0.440 0.437 0.449 0.460 0.478 0.450 0.460 0.482 0.440 0.457 0.439 0.450 0.460 0.484

F test of excluded instruments (126.71)*** (103.42)*** (29.51)*** (142.99)*** (110.23)*** (41.17)*** (143.57)*** (110.37)*** (41.87)*** (151.83)*** (123.62)*** (35.38)*** (143.57)*** (110.18)*** (42.24)***


300 301




1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)


Constant -0.0003 -0.001 -0.030 0.018 0.039 -0.045 0.008 0.025 -0.054 -0.017 -0.005 -0.034 0.004 0.025 -0.053

(-0.01) (-0.02) (-0.40) (0.48) (0.85) (-0.67) (0.20) (0.56) (-0.79) (-0.50) (-0.12) (-0.52) (0.10) (0.54) (-0.81)

CashBonusi,t-1 -0.005 -0.012 0.011

(-0.42) (-0.92) (0.60)

EquityIncentive ($)i,t-1 0.011 0.003 0.035

(1.18) (0.22) (2.06)**


(2.67)*** (2.26)** (1.35)


(6.63)*** (5.57)*** (2.78)***


(2.54)** (1.65)* (2.41)**


(13.02)*** (12.72)*** (3.88)*** (11.69)*** (11.49)*** (3.84)*** (12.56)*** (12.06)*** (4.59)*** (14.13)*** (13.35)*** (4.97)*** (12.52)*** (11.96)*** (4.80)***

DepositBasei,t-1 1.846 1.988 1.302 1.843 2.032 1.220 1.839 2.041 1.138 1.669 1.828 1.078 1.849 2.044 1.147

(14.93)*** (14.34)*** (4.78)*** (14.05)*** (13.47)*** (4.97)*** (14.14)*** (13.66)*** (4.53)*** (13.60)*** (13.02)*** (4.44)*** (14.20)*** (13.61)*** (4.72)***


-5.983 -6.842 -3.193 -5.980 -7.061 -2.999 -6.108 -7.166 -2.992 -5.431 -6.256 -2.699 -6.106 -7.144 -3.040

(-12.65)*** (-12.49)*** (-3.55)*** (-11.86)*** (-11.77)*** (-3.62)*** (-12.23)*** (-12.09)*** (-3.56)*** (-11.78)*** (-11.51)*** (-3.33)*** (-12.21)*** (-12.00)*** (-3.71)***

BankCapitali,t-1 -0.172 -0.183 0.092 -0.167 -0.195 0.105 -0.167 -0.184 0.180 -0.234 -0.223 -0.088 -0.182 -0.192 0.026

(-1.73)* (-1.71)* (0.30) (-1.58) (-1.67)* (0.39) (-1.60) (-1.61) (0.67) (-2.43)** (-2.13)** (-0.32) (-1.74)* (-1.67)* (0.10)

Share of Deposit Financingi,t-1 0.046 0.043 0.077 0.016 0.001 0.076 0.024 0.001 0.091 0.047 0.036 0.086 0.029 0.007 0.098

(1.10) (0.91) (0.96) (0.37) (0.01) (1.07) (0.55) (0.01) (1.24) (1.17) (0.76) (1.23) (0.65) (0.13) (1.38)

BusinessCyclet-1 -0.256 -0.202 -0.699 -0.089 -0.339 -0.674 -0.212 -0.351 -0.757 -0.338 -0.605 -0.666 -0.177 -0.376 -0.775

(-1.15) (-0.47) (-1.65)* (-0.39) (-0.70) (-1.79)* (-0.94) (-0.74) (-1.96)** (-1.61) (-1.46) (-1.81)* (-0.79) (-0.79) (-2.07)**


N 324 252 72 335 252 83 335 252 83 349 269 80 335 252 83

R-square 0.545 0.583 0.439 0.495 0.536 0.452 0.504 0.545 0.435 0.549 0.580 0.467 0.503 0.541 0.463



302 303




1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)


Constant 0.058 0.074 -0.052 0.062 0.077 0.002 0.053 0.067 -0.004 0.041 0.049 -0.012 0.053 0.067 -0.007

(2.53)*** (2.69)*** (-1.19) (2.83)*** (2.83)*** (0.05) (2.45)** (2.42)** (-0.10) (1.89)* (1.84)* (-0.31) (2.43)** (2.42)** (-0.18)

CashBonusi,t-1 -0.003 -0.004 -0.002

(-0.49) (-0.47) (-0.23)

EquityIncentive ($)i,t-1 -0.010 -0.013 -0.013

(-1.76)* (-1.80)* (-1.44)


(0.40) (0.23) (1.14)

EquityIncentive (%)i,t-1 -0.004 0.0002 -0.014

(-0.66) (0.03) (-1.51)


(0.39) (0.17) (0.93)


(17.35)*** (15.55)*** (7.94)*** (19.67)*** (17.01)*** (10.02)*** (19.59)*** (16.87)*** (10.42)*** (19.82)*** (17.83)*** (9.86)*** (19.58)*** (16.87)*** (10.39)***

DepositBasei,t-1 1.328 1.374 1.059 1.425 1.509 1.076 1.443 1.529 1.087 1.549 1.639 1.143 1.444 1.528 1.104

(14.60)*** (13.03)*** (6.29)*** (15.65)*** (13.84)*** (6.92)*** (15.89)*** (14.01)*** (7.01)*** (16.34)*** (14.61)*** (7.14)*** (15.88)*** (13.99)*** (7.16)***


-5.630 -5.896 -4.483 -6.275 -6.638 -5.151 -6.293 -6.624 -5.293 -6.882 -7.302 -5.749 -6.297 -6.623 -5.333

(-13.11)*** (-12.17)*** (-4.81)*** (-14.48)*** (-13.18)*** (-5.91)*** (-14.49)*** (-13.10)*** (-6.12)*** (-14.44)*** (-13.22)*** (-6.33)*** (-14.48)*** (-13.08)*** (-6.16)***

BankCapitali,t-1 -0.388 -0.443 -0.013 -0.463 -0.530 -0.199 -0.456 -0.512 -0.249 -0.341 -0.400 -0.151 -0.455 -0.513 -0.238

(-3.96)*** (-4.06)*** (-0.05) (-3.89)*** (-3.76)*** (-0.95) (-3.82)*** (-3.63)*** (-1.18) (-3.00)*** (-3.03)*** (-0.74) (-3.82)*** (-3.63)*** (-1.13)

Share of Deposit Financingi,t-1 -0.015 -0.041 0.095 -0.008 -0.022 0.047 -0.005 -0.018 0.046 -0.005 -0.019 0.066 -0.005 -0.018 0.049

(-0.57) (-1.33) (1.91)* (-0.33) (-0.76) (1.07) (-0.22) (-0.63) (1.04) (-0.20) (-0.69) (1.47) (-0.21) (-0.63) (1.11)

BusinessCyclet-1 0.113 0.308 -0.910 -0.100 -0.115 -1.056 -0.098 -0.113 -1.035 0.099 0.159 -0.951 -0.099 -0.114 -1.029

(0.74) (1.00) (-3.45)*** (-0.71) (-0.36) (-4.54)*** (-0.69) (-0.35) (-4.46)*** (0.72) (0.56) (-4.04)*** (-0.70) (-0.36) (-4.43)***


N 878 676 202 903 663 240 903 663 240 1011 767 244 903 663 240

R-square 0.405 0.413 0.458 0.451 0.450 0.523 0.449 0.448 0.522 0.436 0.446 0.475 0.449 0.448 0.521



304 305


Table 10 reports the aggregate effects of different CEO incentive measures on bank liquidity holdings. The previous analyses found that the effect of CEO incentives on bank liquidity holdings did not share the same direction. In order to minimize the possibility of offsetting the impact of CEO incentives on bank liquidity holdings, we jointly considered the variables that had the same directional effect on bank liquidity and ran multiple regressions. The results (see Table 10) indicate that CEO equity share significantly and positively affected the level of liquidity holdings. The linkage was particular significant prior to the financial crisis. Subsample analysis showed that the effect was mainly on the S&P 1,500 banks. Banks with CEOs that had higher equity risk exposures to changes in stock price were observed to hold significantly higher liquidity holdings than banks with CEOs that had lower equity risk exposures after the financial crisis. This relationship was not clear before the financial crisis, indicating that CEOs became more sensitive and conservative about bank liquidity policies after the financial crisis when their equity portfolio value was more sensitive to changes in stock volatility. We also found that the significant relationship between the bank liquidity and CEO equity risk exposures mainly existed in S&P 1,500 banks.

The results shown Tables 9 and 10 confirm that CEO incentives generally had significant impacts on bank liquidity holding policies. Among the measures of CEO incentives, CEO equity ownership had a significantly positive impact on the level of liquidity holding. This effect existed only in S&P 1,500 banks. When CEOs of those banks had higher levels of equity risk exposure, they tended to have their banks reserve more liquidity. This tendency was again significant for the S&P 1,500 banks. Combining the results of Tables 4 to 8, we can conclude that banks with different levels of CEO incentives tended to select different types of business policies for the bank, affecting the liquidity holdings and bank performance. Specifically, we found that S&P 1,500 banks that had higher CEO incentives usually took lower proportions of loan commitments, were less involved in non-interest income business activities, but maintained higher levels of liquidity. They also had better performance compared to S&P 1,500 banks managed by CEOs receiving lower incentives.

Table 10 The Relation between Bank Liquidity and CEO Incentives: Combined EffectThis table presents the cross-sectional regression analyses between bank liquidity holdings and CEO incentives from 1992 to 201. We divided our research period into two different sub-periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. All variables are as defined in the Appendix and winsorized at the 5th and 95th percentiles. All dollar values are in inflation-adjusted 2010 dollars. All regressions include firm and year dummies as control variables and standard errors were adjusted for heteroskedasticity and potential clustering of the residual at the firm level. The number of observations varies due to data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.

All banks

Independent Variable 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6)

Constant 0.045 0.063 -0.025 0.029 0.040 -0.017

(2.19)** (2.49)** (-0.67) (1.39) (1.52) (-0.45)

CashBonusi,t-1 0.002 0.002 0.004 0.001 0.001 0.003

(0.30) (0.22) (0.48) (0.23) (0.13) (0.33)

EquityIncentive ($)i,t-1 -0.002 -0.007 0.003

(-0.40) (-1.01) (0.31)


(2.20)** (1.58) (2.09)**


(3.23)*** (3.24)*** (0.20)


(1.92)* (1.29) (2.02)**

LoanCommitmenti,t-1 0.687 0.731 0.562 0.713 0.764 0.555

(19.81)*** (17.80)*** (9.11)*** (20.08)*** (18.23)*** (8.89)***

DepositBasei,t-1 1.515 1.632 1.049 1.549 1.680 1.059

(19.69)*** (17.98)*** (7.76)*** (19.54)*** (17.82)*** (7.83)***


-5.786 -6.406 -3.636 -6.061 -6.760 -3.720

(-16.81)*** (-15.86)*** (-5.87)*** (-16.50)*** (-15.52)*** (-5.91)***

BankCapitali,t-1 -0.305 -0.339 -0.086 -0.281 -0.307 -0.103

(-3.66)*** (-3.60)*** (-0.46) (-3.28)*** (-3.18)*** (-0.54)

Share of Deposit Financingi,t-1 -0.009 -0.029 0.063 -0.008 -0.026 0.057

(-0.37) (-1.06) (1.49) (-0.33) (-0.94) (1.33)

BusinessCyclet-1 -0.145 -0.141 -0.875 -0.089 -0.054 -0.813

(-1.08) (-0.49) (-3.92)*** (-0.65) (-0.19) (-3.58)***

Fixed effect Yes Yes Yes Yes Yes Yes

N 1,061 799 262 1,032 778 254

R-square 0.441 0.453 0.469 0.445 0.461 0.455

F test of excluded instruments

(92.27)*** (72.62)*** (24.74)*** (91.01)*** (73.05)*** (22.64)***


306 307


S&P 1,500 banks


(7) (8) (9) (10) (11) (12)

Constant -0.004 0.008 -0.067 -0.031 -0.023 -0.046

(-0.12) (0.17) (-0.92) (-0.82) (-0.50) (-0.64)

CashBonusi,t-1 -0.011 -0.018 -0.002 -0.007 -0.017 0.009

(-0.98) (-1.28) (-0.12) (-0.63) (-1.26) (0.47)

EquityIncentive ($)i,t-1 0.012 0.007 0.041

(1.26) (0.61) (2.04)**


(3.45)*** (2.59)*** (2.48)**


(6.16)*** (5.43)*** (1.95)*


(2.53)** (2.08)** (1.43)


(12.07)*** (11.66)*** (3.78)*** (13.57)*** (12.76)*** (4.85)***

DepositBasei,t-1 1.860 2.025 1.236 1.675 1.823 1.166

(14.64)*** (13.94)*** (4.75)*** (13.22)*** (12.51)*** (4.45)***


-5.983 -6.891 -3.316 -5.343 -6.107 -3.073

(-12.23)*** (-11.91)*** (-3.84)*** (-11.13)*** (-10.65)*** (-3.56)***

BankCapitali,t-1 -0.185 -0.196 -0.139 -0.275 -0.282 -0.178

(-1.78)* (-1.71)* (-0.47) (-2.73)*** (-2.56)** (-0.57)

Share of Deposit Financingi,t-1 0.030 0.012 0.116 0.050 0.040 0.090

(0.69) (0.24) (1.48) (1.17) (0.79) (1.17)

BusinessCyclet-1 -0.331 -0.174 -0.855 -0.456 -0.460 -0.706

(-1.39) (-0.36) (-2.07)** (-1.99)** (-0.97) (-1.73)*


N 299 227 72 288 217 71

R-square 0.555 0.589 0.507 0.589 0.622 0.512


(40.02)*** (34.49)*** (7.09)*** (44.23)*** (37.79)*** (7.10)***

Non-S&P 1,500 banks


(13) (14) (15) (16) (17) (18)

Constant 0.065 0.090 -0.019 0.056 0.069 0.002

(2.55)** (2.84)*** (-0.42) (2.10)** (2.11)** (0.04)

CashBonusi,t-1 0.003 0.005 0.0002 0.001 0.002 -0.002

(0.45) (0.59) (0.02) (0.16) (0.27) (-0.14)

EquityIncentive ($)i,t-1 -0.007 -0.013 0.0002

(-1.00) (-1.55) (0.01)


(0.65) (0.31) (0.99)

EquityIncentive (%)i,t-1 0.002 0.007 -0.014

(0.30) (0.90) (-1.40)


(0.72) (0.46) (0.73)


(16.71)*** (14.59)*** (8.03)*** (16.73)*** (14.78)*** (8.10)***

DepositBasei,t-1 1.372 1.444 1.056 1.490 1.594 1.081

(13.99)*** (12.33)*** (6.22)*** (14.12)*** (12.55)*** (6.18)***


-5.885 -6.254 -4.568 -6.640 -7.113 -5.041

(-12.64)*** (-11.64)*** (-4.76)*** (-12.45)*** (-11.43)*** (-4.89)***

BankCapitali,t-1 -0.466 -0.532 -0.198 -0.419 -0.483 -0.205

(-3.56)*** (-3.49)*** (-0.78) (-2.98)*** (-2.92)*** (-0.80)

Share of Deposit Financingi,t-1 -0.016 -0.039 0.061 -0.019 -0.038 0.048

(-0.56) (-1.19) (1.20) (-0.69) (-1.13) (0.94)

BusinessCyclet-1 -0.069 -0.075 -0.924 0.001 0.003 -0.852

(-0.43) (-0.21) (-3.44)*** (0.01) (0.01) (-3.15)***


N 762 572 190 744 561 183

R-square 0.423 0.424 0.497 0.425 0.431 0.484


(61.24)*** (45.99)*** (19.74)*** (60.40)*** (46.34)*** (18.06)***

4.3.2 CEO Incentives, Bank Liquidity Holding, and Bank PerformanceFinally we conducted 2-stage least square regressions to explore the relation between

CEO incentives, bank performance, and liquidity holding policies. We used the predicted value of liquidity holding from regression estimation (1) to run the regression of bank performance. Tables 11 and 12 show the results for bank performance measured as ROA and ROE, respectively. Similar to the previous results, we reported the results for the whole sample, S&P 1,500 banks, and non-S&P 1,500 banks. In addition, the empirical relation was

also investigated for the whole research period and the sub-periods. Panel A of Table 11 shows that the coefficients of liquidity across all regressions in the pre-financial crisis period for the whole sample were all significant. The results of the sub-sample analyses, shown in panels B and C, indicate that most of the results were from the S&P1,500 banks. The empirical results from Table 12 are quantitatively similar to the results reported in Table 11: They indicate that banks with higher CEO incentives tended to hold higher levels of liquidity, which also resulted in higher bank performance.


308 309


Table 11 The Relation between Bank return on Asset and CEO Incentives: 2SLS Model Results

This table presents the 2-stage least square results of second stage estimation between bank expected liquidity holdings and bank return on asset from 1992 to 2012. The expected value of bank liquidity is expected from the regression specification in Table 9. We divided our research period into two different sub-periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. All variables are as defined in the Appendix and winsorized at the 5th and 95th

percentiles. All dollar values are in inflation-adjusted 2010 dollars. All regressions include firm and year dummies as control variables and standard errors were adjusted for heteroskedasticity and potential clustering of the residual at the firm level. The J statistic tests if the model over identifies at 1% significance level (Sargan, 1988). The number of observations varies due to data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.



1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Panel A: All banks

Constant 0.025 0.010 0.062 0.025 0.012 0.055 0.025 0.012 0.055 0.024 0.011 0.055 0.024 0.011 0.054

(5.83)*** (3.90)*** (4.43)*** (5.33)*** (4.81)*** (3.90)*** (6.03)*** (5.54)*** (3.89)*** (5.30)*** (4.76)*** (3.89)*** (5.28)*** (4.77)*** (3.85)***

Bank Liquidityi,t-1 0.004 0.010 0.009 0.008 0.008 0.012 0.007 0.008 0.009 0.008 0.009 0.014 0.009 0.009 0.018

(0.88) (3.97)*** (0.47) (1.70)* (3.67)*** (0.72) (1.57) (3.84)*** (0.48) (1.81)* (3.86)*** (0.83) (1.91)* (3.86)*** (1.09)

Share of Deposit Financingi,t-1 -0.003 0.001 -0.022 -0.002 0.002 -0.022 -0.002 0.001 -0.019 -0.002 0.002 -0.022 -0.002 0.002 -0.023

(-0.94) (0.60) (-2.05)** (-0.65) (0.99) (-2.07)** (-0.74) (0.64) (-1.74)* (-0.66) (0.98) (-2.09)** (-0.66) (0.98) (-2.12)**

Loansi,t-1 -0.010 0.002 -0.037 -0.015 0.0002 -0.043 -0.015 0.0002 -0.040 -0.015 0.0003 -0.043 -0.015 0.0003 -0.042

(-4.29)*** (1.45) (-4.23)*** (-5.85)*** (0.12) (-4.81)*** (-6.01)*** (0.19) (-4.57)*** (-5.80)*** (0.20) (-4.78)*** (-5.77)*** (0.19) (-4.68)***

Bank sizei,t-1 -0.0002 -0.0001 -0.001 0.0002 0.00003 0.0001 0.00002 0.000002 -0.0002 0.0001 0.00003 0.0001 0.0001 0.00003 0.0001

(-0.83) (-0.38) (-0.79) (0.61) (0.26) (0.17) (0.10) (0.01) (-0.27) (0.60) (0.23) (0.15) (0.59) (0.23) (0.11)

Non-interest income ratioi,t-1 -0.013 -0.004 -0.035 -0.016 -0.008 -0.028 -0.015 -0.008 -0.029 -0.016 -0.007 -0.028 -0.016 -0.007 -0.028

(-4.60)*** (-2.58)*** (-3.50)*** (-4.89)*** (-4.47)*** (-2.68)*** (-5.03)*** (-4.70)*** (-2.81)*** (-4.87)*** (-4.44)*** (-2.68)** (-4.87)*** (-4.45)*** (-2.68)***


N 1,202 928 274 1,238 915 323 1,238 915 323 1,360 1,036 324 1,238 915 323

Overidentification test, J-statistic (7.17) (20.86) (6.44) (7.05) (22.38) (4.49) (9.09) (31.20) (5.82) (7.06) (22.43) (4.50) (7.08) (22.44) (4.59)


310 311




1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)


Constant 0.030 0.018 0.091 0.034 0.013 0.100 0.032 0.016 0.087 0.033 0.013 0.098 0.033 0.013 0.094

(3.15)*** (4.60)*** (2.61)*** (3.26)*** (3.33)*** (3.22)*** (3.32)*** (4.13)*** (2.69)*** (3.18)*** (3.27)*** (3.17)*** (3.19)*** (3.31)*** (3.01)***


(1.22) (3.65)*** (0.67) (1.04) (3.96)*** (0.22) (1.67)* (3.49)*** (0.79) (1.38) (4.06)*** (0.47) (1.36) (3.99)*** (0.80)


(-0.69) (0.11) (-2.07)** (-0.86) (0.82) (-2.24)** (-1.10) (0.11) (-2.21)** (-0.89) (0.80) (-2.28)** (-0.89) (0.80) (-2.35)**

Loansi,t-1 -0.011 0.00001 -0.051 -0.018 0.0004 -0.065 -0.014 0.002 -0.053 -0.018 0.001 -0.063 -0.018 0.001 -0.059

(-2.44)*** (0.01) (-2.61)*** (-3.57)*** (0.20) (-3.44)*** (-2.83)*** (0.83) (-2.62)*** (-3.43)*** (0.36) (-3.35) (-3.43)*** (0.30) (-3.05)***

Bank sizei,t-1 -0.001 -0.0004 -0.002 -0.0005 -0.00003 -0.002 -0.0005 -0.0003 -0.002 -0.0004 -0.00003 -0.002 -0.0005 -0.00004 -0.002

(-0.87) (-1.57) (-0.79) (-0.73) (-0.15) (-0.88) (-0.83) (-1.26) (-0.90) (-0.73) (-0.14) (-0.90) (-0.73) (-0.16) (-0.93)


(-2.57)*** (-4.06)*** (-0.99) (-2.36)** (-3.85)*** (-0.85) (-2.28)** (-3.34)*** (-0.68) (-2.32)** (-3.83)*** (-0.83) (-2.33)** (-3.86)*** (-0.77)


N 324 252 72 335 252 83 335 252 83 349 269 80 335 252 83



Constant 0.023 0.006 0.057 0.021 0.010 0.044 0.023 0.011 0.045 0.021 0.010 0.044 0.021 0.010 0.044

(4.80)*** (1.97)** (3.56)*** (4.18)*** (3.40)*** (2.71)*** (4.89)*** (4.03)*** (2.85)*** (4.17)*** (3.39)*** (2.71)*** (4.16)*** (3.39)*** (2.71)**

Bank Liquidityi,t-1 -0.001 0.007 0.008 0.004 0.004 0.018 0.004 0.005 0.022 0.005 0.004 0.020 0.005 0.004 0.022

(-0.26) (2.13)** (0.42) (0.83) (1.44) (1.06) (0.97) (1.96)** (1.19) (0.96) (1.52) (1.17) (1.00) (1.53) (1.28)


(-0.79) (0.32) (-1.30) (-0.37) (0.33) (-1.09) (-0.40) (0.18) (-0.88) (-0.37) (0.33) (-1.11) (-0.37) (0.33) (-1.12)

Loansi,t-1 -0.009 0.004 -0.032 -0.013 0.002 -0.036 -0.014 0.001 -0.035 -0.013 0.002 -0.035 -0.013 0.002 -0.035

(-3.14)*** (2.10)** (-3.14)*** (-4.21)*** (1.02) (-3.33)*** (-4.70)*** (0.74) (-3.28)*** (-4.19)*** (1.04) (-3.32)*** (-4.18)*** (1.04) (-3.30)***

Bank sizei,t-1 0.00003 0.0003 -0.001 0.0004 0.0003 0.00002 0.0003 0.0003 -0.0004 0.0004 0.0003 -0.00001 0.0004 0.0003 -0.00004

(0.12) (1.52) (-0.99) (1.53) (2.00)** (0.02) (0.99) (2.05)** (-0.47) (1.51) (1.97)** (-0.01) (1.50) (1.97)** (-0.04)


(-4.11)*** (-1.87)* (-3.03)*** (-4.55)*** (-4.33)*** (-2.22)** (-4.64)*** (-4.74)*** (-2.41)** (-4.53)*** (-4.32)*** (-2.20)** (-4.53)*** (-4.32)*** (-2.20)**


N 878 676 202 903 663 240 903 663 240 1,011 767 244 903 663 240



312 313


Table 12 The Relation between Bank Return on Equity and CEO Incentives: 2SLS Model Results

This table presents the 2-stage least square results of second stage estimation between bank expected liquidity holdings and bank return on equity from 1992 to 2012. The expected value of bank liquidity is expected from the regression specification in Table 9. We also divided our research period into two different sub-periods. The pre-financial crisis period is 1992 to 2006, and 2007 to 2012 is the post-crisis period. All variables are as defined in the Appendix and winsorized at the 5th and 95th

percentiles. All dollar values are in inflation-adjusted 2010 dollars. All regressions include firm and year dummies as control variables and standard errors were adjusted for heteroskedasticity and potential clustering of the residual at the firm level. The J statistic tests if the model over identifies at 1% significance level (Sargan, 1988). The number of observations varies due to data availability. ***, **, and * represent 1%, 5%, and 10% significance levels, respectively.



1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)

Panel A: All banks

Constant 0.384 0.102 1.150 0.347 0.118 0.918 0.352 0.115 0.923 0.344 0.116 0.908 0.342 0.116 0.896

(3.12)*** (3.26)*** (2.24)** (2.76)*** (3.72)*** (1.98)** (3.08)*** (4.04)*** (1.99)** (2.74)*** (3.67)*** (1.96)** (2.72)*** (3.67)*** (1.93)*


(0.42) (3.65)*** (0.67) (0.89) (3.16)*** (0.61) (0.84) (3.57)*** (0.50) (1.01) (3.36)*** (0.79) (1.08) (3.36)*** (0.95)


(-0.89) (1.04) (-1.49) (-0.75) (0.85) (-1.45) (-0.68) (0.90) (-1.23) (-0.75) (0.84) (-1.47) (-0.75) (0.84) (-1.49)

Loansi,t-1 -0.229 -0.011 -0.698 -0.295 -0.0178 -0.800 -0.282 -0.0150 -0.756 -0.292 -0.0164 -0.788 -0.291 -0.0165 -0.773

(-3.31)*** (-0.65) (-2.21)** (-4.10)*** (-1.00) (-2.74)*** (-4.24)*** (-0.91) (-2.60)*** (-4.06)*** (-0.92) (-2.69)*** (-4.04)*** (-0.92) (-2.63)***

Bank sizei,t-1 -0.004 0.0004 -0.018 0.003 0.001 0.004 0.001 0.001 -0.006 0.003 0.001 0.003 0.003 0.001 0.003

(-0.54) (0.27) (-0.62) (0.51) (0.56) (0.16) (0.10) (0.48) (-0.23) (0.50) (0.54) (0.13) (0.50) (0.54) (0.11)


(-1.87)* (-0.82) (-1.28) (-1.98)** (-1.91)* (-1.01) (-1.93)* (-1.83)* (-1.02) (-1.97)** (-1.88)* (-1.01) (-1.97)** (-1.89)* (-1.01)


N 1,202 928 274 1,238 915 323 1,238 915 323 1,360 1,036 324 1,238 915 323



314 315




1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012 1992-2012 1992-2006 2007-2012

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15)


Constant 0.301 0.162 0.921 0.411 0.132 1.083 0.360 0.161 0.824 0.395 0.129 1.085 0.394 0.131 0.928

(0.97) (3.26)*** (0.65) (1.32) (2.56)** (0.94) (1.24) (3.39)*** (0.67) (1.27) (2.51)** (0.94) (1.27) (2.56)** (0.80)


(0.59) (3.15)*** (0.75) (0.56) (3.49)*** (0.60) (0.86) (3.38)*** (0.69) (0.77) (3.57)*** (0.61) (0.78) (3.47)*** (0.95)


(-0.81) (1.67)* (-1.96)** (-0.93) (1.70)* (-1.93)* (-1.04) (1.14) (-1.90)* (-0.94) (1.68)* (-1.94)* (-0.94) (1.68)* (-2.01)**

Loansi,t-1 -0.223 -0.05163 -0.716 -0.328 -0.0461 -0.763 -0.271 -0.040 -0.590 -0.317 -0.043 -0.761 -0.317 -0.044 -0.610

(-1.46) (-2.16)** (-0.90) (-2.16)** (-1.88)* (-1.09) (-1.81)* (-1.69)* (-0.77) (-2.07)** (-1.73)* (-1.09) (-2.07)** (-1.80)* (-0.84)

Bank sizei,t-1 -0.004 -0.004 -0.020 -0.006 -0.002 -0.043 -0.005 -0.004 -0.036 -0.006 -0.002 -0.044 -0.006 -0.002 -0.046

(-0.18) (-1.50) (-0.18) (-0.35) (-0.81) (-0.53) (-0.28) (-1.64) (-0.42) (-0.34) (-0.80) (-0.53) (-0.34) (-0.82) (-0.56)

Non-interest income ratioi,t-1 0.086 -0.044 1.323 0.066 -0.040 1.230 0.078 -0.031 1.354 0.071 -0.039 1.228 0.070 -0.040 1.283

(0.46) (-1.54) (1.37) (0.36) (-1.38) (1.39) (0.43) (-1.10) (1.46) (0.38) (-1.36) (1.39) (0.38) (-1.39) (1.45)


N 324 252 72 335 252 83 335 252 83 349 269 80 335 252 83



Constant 0.450 0.077 1.342 0.372 0.103 0.958 0.379 0.096 0.999 0.369 0.102 0.957 0.368 0.102 0.956

(3.55)*** (2.00)** (2.51)** (2.80)*** (2.66)*** (1.94)* (3.17)*** (2.79)*** (2.05)** (2.78)*** (2.65)*** (1.94)* (2.77)*** (2.65)*** (1.94)*

Bank Liquidityi,t-1 -0.009 0.075 0.470 0.084 0.047 0.511 0.076 0.058 0.524 0.102 0.051 0.591 0.105 0.051 0.621

(-0.07) (1.97)** (0.73) (0.64) (1.27) (0.96) (0.64) (1.79)* (0.93) (0.78) (1.37) (1.11) (0.80) (1.38) (1.17)

Share of Deposit Financingi,t-1 -0.060 0.004 -0.353 -0.037 -0.003 -0.238 -0.022 0.002 -0.162 -0.037 -0.003 -0.245 -0.037 -0.003 -0.249

(-0.68) (0.15) (-0.85) (-0.41) (-0.11) (-0.64) (-0.27) (0.10) (-0.44) (-0.41) (-0.11) (-0.67) (-0.41) (-0.11) (-0.67)

Loansi,t-1 -0.215 0.016 -0.638 -0.272 0.012 -0.734 -0.267 0.012 -0.716 -0.269 0.012 -0.729 -0.269 0.012 -0.724

(-2.81)*** (0.70) (-1.88)* (-3.31)*** (0.50) (-2.23)** (-3.59)*** (0.56) (-2.21)** (-3.29)*** (0.52) (-2.22)** (-3.28)*** (0.52) (-2.21)**

Bank sizei,t-1 -0.005 0.004 -0.039 0.004 0.004 -0.008 0.0004 0.004 -0.021 0.004 0.004 -0.009 0.004 0.004 -0.009

(-0.79) (1.71)* (-1.34) (0.60) (1.99)** (-0.30) (0.06) (2.13)** (-0.78) (0.58) (1.96)** (-0.34) (0.57) (1.96)** (-0.35)


(-2.99)*** (-1.04) (-2.30)** (-2.96)*** (-2.49)** (-1.93)* (-2.87)*** (-2.53)** (-1.95)* (-2.95)*** (-2.48)** (-1.92)* (-2.94)*** (-2.48)** (-1.92)*


N 878 676 202 903 663 240 903 663 240 1,011 767 244 903 663 240



316 317


5. Conclusions and DiscussionsWith this study, we aimed to understand whether CEO incentives affect bank

liquidity management. We proposed that CEOs with better incentives to maximize shareholder wealth take risks that they view as judicious or profitable for shareholders, so their liquidity management differs from banks with poorer CEO incentives. To test these ideas, we collected data from commercial banks in the United States from the period 1992 to 2012. Data from a sample of banks within and outside the S&P 1,500 were included in our research. We hand collected data on CEO incentives by retrieving proxy statements for each bank during the sample years to maximize the sample size.

Summary statistics of the research variables show that commercial banks’ CEO compensation packages did not significantly change after the 2007 financial crisis. The equity portfolio as the CEO incentive mechanism became less important with the substantial decline in stock price after the financial crisis. Meanwhile, we also observed that banks awarded more stock grants to CEOs as an incentive scheme to motivate managers after the financial crisis. We also compared whether there were differences in business activities for different types of banks, and we found that S&P 1,500 banks had a larger proportion of loan commitments, earned a larger proportion of their income from non-traditional banking activities, and also maintained higher liquidity ratios.

Then, we investigated the association between CEO incentives and bank liquidity holdings. We found that CEOs equity incentives, in terms of dollar gains or percentage benefit from change in stock price, had different impacts on bank liquidity holding policy for different types of banks in the US. Specifically, S&P 1,500 banks with high CEO equity incentives usually maintained higher level of bank liquidity, but non-S&P 1,500 banks with high CEO equity incentives maintained significantly lower liquidity ratios than banks with low CEO equity incentives.

We also examined whether CEO incentives affected banks’ risk-taking attitudes as reflected in the banks’ business policies, such as loan commitments, deposits, and non-interest income business activities. We found that banks offering larger CEO cash bonuses tended to make larger loan commitments, take more deposits, and operate in more non-interest earning activities than banks providing lower CEO cash bonuses. We also found that banks with different levels of CEO equity value or shares affected loan commitments, deposit-taking, and non-interest earning business activities.

Finally, we conducted multivariate regression analyses to examine whether CEO incentives were associated with bank performance. The results confirm that CEO incentives generally had significant impacts on bank liquidity holding policies. The 2-stage least square regressions indicate that the coefficients of liquidity across all regressions in the prior-financial crisis period for the whole sample were all significant. The significant association of CEO incentives, bank liquidity, and bank performance were mainly derived from S&P 1,500 banks.

Taken together, our empirical studies provide detailed evidence that CEO incentives play an important role in determining bank liquidity policy. Banks with different levels of CEO incentives tend to conduct different types of business policies, affecting bank liquidity holdings and bank performance. This effect is particularly strong for S&P 1,500 banks. Our analyses show insignificant linkage between bank liquidity, CEO incentives, and bank performance for non-S&P 1,500 banks. This study also provides supplementary evidence that negligence of bank liquidity policy is one of the main reasons for financial crises (Acharya and Naqvi, 2012).


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Appendix. Summary of Research Variables Used in the StudyWe collected data from ExecuComp database and hand collected data from proxy statements to measure the CEO incentives of the sample banks. Financial data from the sample banks was from Compustat Bank database, or “Call Report.” Business cycle data was from the Federal Reserve Board of Governors.

Variables Definitions

Panel A: Variables of Interest

CEO Incentives

We followed Fahlenbrach and Stulz (2011) and measured the CEO incentives in five different categories: (1) CEO short-term incentive was gauged by the ratio of cash bonus to cash salary; (2) equity incentives ($) was measured by dollar gains of CEO portfolio from 1% change in stock price; specifically, it equals to the dollar change in the executive’s stock and option portfolio value for a 1% change in the stock price; (3) equity incentive (%) was measured by percentage shares owned by CEO; (4) equity risk exposure ($) was equal to the dollar change in the CEO’s equity portfolio value for a 1% change in stock volatility; and (5) equity risk exposure (%) was defined as the percentage change in the equity portfolio value for a 1% increase in stock volatility and was calculated from all option series held by the CEO.

Bank Liquidity Ratio

Bank liquidity asset divided by total assets. Specifically, bank liquidity asset was the sum of Fed funds sold and securities purchased under agreement to resell, securities held to maturity, and securities available for sale.

Bank Return on Asset

The ratio of EBIT to total bank asset.

Bank Return on Equity

The ratio of EBIT to total bank equity.

Panel B: Variables of Bank Characteristics

Loan Commitment The ratio of unused loan commitments to commitments plus loans.

Loans The ratio of total loans to total assets.

Deposit Base The ratio of transactions deposits to total deposits.

Bank SizeNatural log of gross total asset, where gross total asset equals total assets plus the allowance for loan and lease losses and the allocated transfer risk reserve.

Bank Capital The ratio of total equity capital to total bank asset.

Share of Deposit Financing

The ratio of total deposits to total assets.

Cost of Deposit The ratio of net interests paid to total deposits.

Non-interest income ratio

The ratio of non-interest income to net income.

Bank Insolvency Risk

Bank z-score was used to proxy for bank insolvency risk. Specifically, it was calculated by the return on assets plus the capital asset ratio divided by the standard deviation of asset returns. The standard deviation of asset returns was computed by using the asset returns from previous five years. A higher z-score indicates greater bank stability.

Panel C: Variable proxy for Market Conditions

Business Cycle The GDP growth rate was used as a proxy for the business cycle.


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Author Biography*I-Ju Chen

I-Ju Chen got her finance PhD from the Department of Finance, National Taiwan University, Taiwan. She is an associate professor of Finance Discipline, Yuan Ze University, Taiwan. Her research interests include corporate investment, corporate governance, bank liquidity management, and corporate behavior finance. Her works have appeared in Journal of Banking and Finance, Journal of Business Finance and Accounting, Journal of Applied Corporate Finance, International Review of Economics and Finance, Journal of Management & Organization, Review of Securities and Futures Markets, NTU Management Review, and Management Review.

Wei-Chih LinWei-Chih Lin got his finance PhD from Yuan Ze University, Taiwan. He is an Adjunct

Assistant Professor of College of Management, Yuan Ze University, Taiwan. His research interests include corporate finance, corporate innovation, bank liquidity management, and risk management, etc.

* We wish to thank anonymous reviewers, Yan-Shing Chen, and the participants of the 2016 Management Theory and Practice Conference for helpful comments and suggestions. I-Ju Chen acknowledges the funding from the Ministry of Science and Technology in Taiwan (104-2410-H-155 -005 -MY2; MOST 106-2410-H-155 -005 -MY2).

*E-mail: [email protected]

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