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Pay Gap Matters: Evidence from Bank Liquidity Creation

Lookup NU author(s): Dr Mamiza HaqORCiD

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This work is licensed under a Creative Commons Attribution 4.0 International License (CC BY 4.0).

Abstract

© The Author(s) 2026. Using data on publicly traded U.S. bank holding companies from 1992 to 2019, we examine whether disparities between CEO and non-CEO executive pay affect banks’ liquidity creation. We find that banks with larger CEO pay gaps create more liquidity, but this positive association emerges only after the global financial crisis. A difference-in-differences analysis around the 2011 implementation of the Dodd-Frank Act corroborates these findings: the interaction between post-2011 and the pay-gap measures is positive and significant, implying that post-crisis compensation and governance reforms strengthened the incentive role of pay inequality. The effect is concentrated in on-balance-sheet liquidity creation and in banks with stronger risk-absorbing capacity, low market competition, and sound governance. Together, the results reveal a dynamic link between executive pay structure and bank behavior, suggesting that post-crisis reforms amplified the motivational channel of pay disparity while overly restrictive pay limits could unintentionally dampen banks’ liquidity-creation capacity.

Publication metadata

Author(s): Pathan S, Zheng C, Haq M, Cheung AWK, Addo KA

Publication type: Article

Publication status: Published

Journal: Journal of Financial Services Research

Year: 2026

Pages: Epub ahead of print

Online publication date: 13/03/2026

Acceptance date: 03/11/2025

Date deposited: 14/04/2026

ISSN (print): 0920-8550

ISSN (electronic): 1573-0735

Publisher: Springer Nature

URL: https://doi.org/10.1007/s10693-025-00460-2

DOI: 10.1007/s10693-025-00460-2

Data Access Statement: Data can be shared upon request.

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