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Optimize the Banker’s Multi-Stage Decision-Making and the Mechanism of Pay Contract Influencing on Bank Default Risk in the Long-Term Model

Author

Listed:
  • Tianyi Ma

    (School of Management, Harbin Institute of Technology, Harbin 150000, China)

  • Minghui Jiang

    (School of Management, Harbin Institute of Technology, Harbin 150000, China)

  • Xuchuan Yuan

    (School of Business, Singapore University of Social Sciences, Singapore 599494, Singapore)

Abstract

In recent years, researchers have been devoted to illustrating the correlation between bankers’ pay contracts and a bank’s risk-taking behavior where corporate governance is concerned, especially throughout the past four decades and by using empirical analysis. Despite being a widespread concern, the causality of this relationship is not thoroughly understood. We initiate this research by modeling bankers’ multi-stage decisions of option investment and bond investment from the perspective of theoretical analysis, and by analyzing the function image results using data from Wells Fargo & Co. from the ExecuComp, BvD Orbis, and CRSP-COMPUSTAT databases. We aim to deeply explore the mechanism of how compensation influencing on risk. We are the first to find that it has a “risk cap”, which is the optimal risk level to maximize the return of decision-making. We are also the first to discover the optimal decision coefficient level to maximize the decision return, during which the internal causes and mechanisms of the impact of bankers’ compensation on a bank’s default risk are revealed. We also illustrate the influence of the number of periods. We expect our findings to provide advice for establishing policies when designing pay contracts.

Suggested Citation

  • Tianyi Ma & Minghui Jiang & Xuchuan Yuan, 2020. "Optimize the Banker’s Multi-Stage Decision-Making and the Mechanism of Pay Contract Influencing on Bank Default Risk in the Long-Term Model," Sustainability, MDPI, vol. 12(4), pages 1-22, February.
    • Handle: RePEc:gam:jsusta:v:12:y:2020:i:4:p:1400-:d:320488
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    References listed on IDEAS

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