Executive Perks and the Horizon Effect in China
Martin J. Conyon
Lancaster University; Wharton School, Center for Human Resources
Junxiong Fang Sr.
Fudan University - School of Management
State University of New York (SUNY) College at Brockport
May 22, 2014
We investigate whether executives consume abnormal perks in the CEO’s terminal years to test the horizon effect. Using data on Chinese publicly traded firms between 2003 and 2011 we find that perks are significantly higher in the last two years of CEO tenure compared to previous years. Executive perks in CEO terminal years is lower when the board is more independent, when managerial ownership is higher, when the external auditor is more reputable, and when product market competition is more intense. Abnormal perks are higher in state-owned enterprises (SOEs) compared to non-SOEs. Perks differ by CEO turnover types. Voluntary CEO turnovers and turnovers with external successors are associated with higher excess perk consumption than forced turnovers and turnovers with internal successors. We find little evidence that perks substitute for executive compensation. Our results suggest that abnormal perk consumption is associated with resource diversion and not by efficient compensation contracts in China. Overall, the empirical evidence demonstrates a clear horizon effect and a spillover effect where all executives consume more perks at the expense of shareholders.
Number of Pages in PDF File: 50
Keywords: Perquisites; Horizon effect; Corporate Governance; China
JEL Classification: G3working papers series
Date posted: November 18, 2013 ; Last revised: June 25, 2014
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