Does Chinese State Control Facilitate Relative Performance Evaluation?

33 Pages Posted: 19 Sep 2012

See all articles by Edward Lee

Edward Lee

University of Manchester - Alliance Manchester Business School

Martin Walker

University of Manchester - Manchester Business School

Jessie Y. Zhu

University of Toronto - Rotman School of Management

Date Written: September 17, 2012

Abstract

Previous studies of relative performance evaluation (RPE) for executive compensations in Western developed markets have produced mixed findings. This is partly because the dispersion of share ownership in Western capital markets does not closely correspond with the single-principal/multi-agent theoretical setting assumed by Holmstrom (1982). In this study, we exploit the existence of a large number of state-owned enterprises (SOEs) in China to examine RPE in a setting closer to the theoretical assumption. We find that SOEs are more likely to use RPE for executive compensation than non-SOEs. This is consistent with better cross-firm coordination in executive contracting among SOEs under a common “state” principal than among non-SOEs with dispersed principals similar to Western firms. Furthermore, we find a more pronounced RPE effect among SOEs that are larger or have poorer past performance. This implies that the state principal has greater incentives to monitor strategically important firms or those in distress.

Keywords: relative performance evaluation, executive compensation, Chinese state-owned enterprises, state control

JEL Classification: G30, J33, M41, M52, N25, N45

Suggested Citation

Lee, Edward and Walker, Martin and Zhu, Jessie Y., Does Chinese State Control Facilitate Relative Performance Evaluation? (September 17, 2012). Available at SSRN: https://ssrn.com/abstract=1759554 or http://dx.doi.org/10.2139/ssrn.1759554

Edward Lee

University of Manchester - Alliance Manchester Business School ( email )

Booth St. West (Crawford House)
Manchester, M15 6PB
United Kingdom

Martin Walker (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Jessie Y. Zhu

University of Toronto - Rotman School of Management ( email )

105 St. George Street
Toronto, Ontario M5S 3E6 M5S1S4
Canada

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