Corporate Tournament and Executive Compensation in a Transition Economy: Evidence from Publicly Listed Firms in China

31 Pages Posted: 22 Apr 2009

See all articles by Chen Lin

Chen Lin

The University of Hong Kong - Faculty of Business and Economics

Wei Shen

University of Florida - Warrington College of Business Administration

Dongwei Su

Jinan University - Finance Department

Date Written: April 22, 2009

Abstract

This article tests several predictions of tournament theory on executive compensation in the context of a transition economy. Using an unbalanced panel which consists of a total of 34701 executives in 450 publicly listed firms in China during 1999 and 2006, we find that (1) pay increases as executives move up the corporate hierarchy into higher ranks; (2) pay gap is the largest between the first and second tier executives, although it does not increase monotonically across all executive ranks; and (3) pay dispersion increases with the number of tournament participants and the level of noise in the business environment. In addition, we find evidence that state ownership of shares reduces executive compensation and pay gap, and corporate governance structure affect pay dispersion. Overall, our study shows that listed firms in China, as they become more and more market-oriented, have adopted a pay structure that is largely consistent with the predictions of tournament theory, and that it is important to consider both ownership structure and corporate governance in analyzing executive compensation structure.

Keywords: Executive compensation, Tournament theory, Corporate governance, Ownership structure, China

JEL Classification: J31, G30, P30

Suggested Citation

Lin, Chen and Shen, Wei and Su, Dongwei, Corporate Tournament and Executive Compensation in a Transition Economy: Evidence from Publicly Listed Firms in China (April 22, 2009). Available at SSRN: https://ssrn.com/abstract=1393507 or http://dx.doi.org/10.2139/ssrn.1393507

Chen Lin

The University of Hong Kong - Faculty of Business and Economics ( email )

Pokfulam Road
Hong Kong
China

Wei Shen

University of Florida - Warrington College of Business Administration ( email )

Gainesville, FL 32611
United States

Dongwei Su (Contact Author)

Jinan University - Finance Department ( email )

Department of Finance
Jinan University
Guangzhou, Guangdong 510632
China

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