臺大管理論叢 NTU Management Review VOL.29 NO.1

CEO Incentives and Bank Liquidity Management 258 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).