Foreign Equity Participation,Executive Compensation And Commercial Banks' Risk-Taking

The slowdown in the growth of net profit and the increase in the balance of non-performing loans indicate that the risk exposure of commercial banks in China is increasing.After many years of rapid growth in double-digit among large state-owned commercial banks,the growth rate of net profit has dropped to single digits in 2014,and even zero growth thereafter.In terms of bank asset quality,the balance of non-performing loans increased from 492.9 billion yuan in 2012 to 1,705.7 billion yuan in 2017,an increase of 246.05%;the non-performing loan ratio also increased from 0.95% in 2012 to 1.74% in 2017,an increase of 7.9 percentage points.As important measures to deepen the reform of the banking industry,what is the effect of the executive compensation mechanism of commercial banks on preventing bank risk-taking? And what is the effect of the introducing of foreign strategic investors on the correlation between executive compensation and bank risk-taking? Most of the existing literature studies the correlation between executive compensation and bank risk exposure.It does not test the difference in different bank categories,and does not include foreign participation factors into the research scope.Therefore,based on the study of the impact of executive compensation on bank risk exposure,this paper studies whether there is a difference between bank categories,and examines the effect of introduction of foreign equity on the correlation between executive compensation in commercial banks and bank risk exposure.The result of this paper is to provide theoretical basis and empirical support for improving the executive compensation mechanism and foreign equity participation policies to reduce the risk exposure of commercial banks.Firstly,this paper systematically sorts out the domestic and international research on executive compensation and bank risk-taking,foreign equity participation and bank risk-taking.Secondly,based on strategic alliance theory,equity balance theory and the agency theory,this paper explains the internal relationship between foreign shareholding,executive compensation and bank risk taking from different angles,and proposes the research hypothesis of this paper.Then,based on the dual perspective of bank category and the basic characteristics of foreign shareholding,this paper test the relationship between foreign equity participation,executive compensation and bank risk exposure of 73 commercial banks from 2007-2017.The results show that:(1)there is a significant positive correlation between executive compensation and bank risk-taking,and the positive correlation exists in large state-owned banks and city commercial banks,and is negatively correlated in joint-stock commercial banks;(2)further research finds that introducing foreign equity,increasing foreign shareholding ratio,introducing foreign directors and introducing foreign directors to the salary or the audit committee weaken the positive correlations between executive compensation and bank risk-taking,but the ratio of foreign directors has no significant impact on the correlation between executive compensation and bank risk exposure.In addition,considering the institutionalized background factors,this paper further studies the impact of commercial bank executive compensation supervision.In order to enhance the reliability of the research results,this paper conducts a robust test from the change of executive compensation variable and macroeconomic control variable,and the research conclusions still exist.Finally,this paper proposes policy recommendations to reduce bank risk exposure from the aspects of improving bank executive compensation mechanism and foreign equity participation policy.(1)Improve the senior management compensation system of commercial banks to reduce bank risk exposure.It mainly includes incorporating bank risk factors into the system design of executive compensation;enhancing the transparency of the information disclosure about commercial bank executive compensation;increasing the proportion of long-term incentives.(2)Improve the foreign equity participation policy of commercial banks to improve bank governance and strengthen bank risk management and control.Actively introduce foreign shareholders to participate in Chinese commercial banks,and appropriately increase the proportion of foreign equity and actively introduce foreign directors into the board of directors and professional committees.The innovations of this paper are as follows: firstly,this paper introduces the foreign equity participation into the research scope of executive compensation and bank risk exposure for the first time,thus providing a new research perspective.Secondly,considering board level factors,this paper measures foreign equity participation variable from whether there is foreign investment,foreign shareholding ratio,whether to introduce foreign directors,the ratio of foreign directors,whether to introduce foreign directors to the salary or the audit committee to test the effect of foreign equity participation on Chinese commercial banks.Thirdly,this paper includes unlisted commercial banks into the research scope,so that the research objects cover large state-owned banks,joint-stock commercial banks and city commercial banks.The research samples are more representative and the research conclusions are more comprehensive.In addition,this paper further examines the differences in the impact of executive compensation on bank risk exposure among different bank categories,and provides a basis for improving the executive compensation mechanism of commercial banks.