Executive Compensation and Corporate Fraud in China

Abstract

This study investigates the relation between CEO compensation and corporate fraud in China. We document a significantly negative correlation between CEO compensation and corporate fraud using data on publicly traded firms between 2005 and 2010. Our findings are consistent with the hypothesis that the firm’s owners and the board of directors penalize CEOs for fraud by awarding lower pay. We also find that executive compensation is lower in firms that commit more severe frauds. Panel data fixed effects and propensity score methods are used to demonstrate these effects. We also show that CEOs of privately controlled firms, firms that split the posts of CEO and chairman, and CEOs of firms located in developed regions, suffer larger compensation penalties for committing financial fraud. Finally, we show that CEOs at firms that commit fraud are more likely to be replaced (lose their jobs) compared to non-fraud firms.

Keywords: Executive Compensation, China