Disproportional Ownership Structure and Pay-Performance Relationship: Evidence from China's Listed Firms

32 Pages Posted: 11 Sep 2014

See all articles by Jerry Cao

Jerry Cao

Independent

Xiaofei Pan

University of Wollongong

Gary Gang Tian

Macquarie University - Department of Applied Finance and Actuarial Studies; Macquarie University, Macquarie Business School

Date Written: 2011

Abstract

This paper examines the impact of ownership structure on executive compensation in China’s listed firms. We find that the cash flow rights of ultimate controlling shareholders have a positive effect on the pay-performance relationship, while a divergence between control rights and cash flow rights has a significantly negative effect on the pay-performance relationship. We divide our sample based on ultimate controlling shareholders’ type into state owned enterprises (SOE), state assets management bureaus (SAMB), and privately controlled firms. We find that in SOE controlled firms cash flow rights have a significant impact on accounting based pay-performance relationship. In privately controlled firms, cash flow rights affect the market based pay-performance relationship. In SAMB controlled firms, CEO pay bears no relationship with either accounting or market based performance. The evidence suggests that CEO pay is inefficient in firms where the state is the controlling shareholder because it is insensitive to market based performance but consistent with the efforts of controlling shareholders to maximize their private benefit.

Keywords: Managerial compensation, Firm performance, Ownership structure

JEL Classification: G32; G34

Suggested Citation

Cao, Jerry and Pan, Xiaofei and Tian, Gary Gang, Disproportional Ownership Structure and Pay-Performance Relationship: Evidence from China's Listed Firms (2011). Journal of Corporate Finance, Vol. 17, No. 3, 2011. Available at SSRN: https://ssrn.com/abstract=2494017

Jerry Cao

Independent

No Address Available

Xiaofei Pan

University of Wollongong ( email )

Wollongong, New South Wales 2500
Australia

Gary Gang Tian (Contact Author)

Macquarie University - Department of Applied Finance and Actuarial Studies ( email )

Room 513, Building E4A
North Ryde, NSW, 2109
Australia

Macquarie University, Macquarie Business School ( email )

New South Wales 2109
Australia

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