Corporate Governance, Product Market Competition and Managerial Incentives: Evidence from Four Pacific Basin Countries

This study examines how firm- and country-level governance mechanisms affect the role of industry competition in influencing managerial incentives. Specifically, we examine how concentrated ownership structures and legal institutions affect the positive association between industry competition and pay-performance sensitivity. By using samples from four East Asian markets (China, Hong Kong, Singapore and Taiwan) for the 2001-2006 periods, we find that: (1) Industry competition leads to strong pay-performance sensitivity for widely-held firms but not for family- or state-controlled firms, suggesting that the governance role of industry competition is weaken when firms are controlled by family or state; (2) in weak (strong) legal environment, the positive association between industry competition and pay-performance sensitivity is less (more) pronounced, indicating that without strong country-level institutions, industry-level governance mechanisms cannot function well. Overall, our results suggest the importance of firm-level and country-level governance in ensuring the effectiveness of industry-level governance mechanisms.

Keywords: Product market competition; Managerial incentives; East Asian markets; Legal environment; Corporate governance; Ownership structure

Suggested Citation: Suggested Citation

KO, Hin Cheung, Annie and KO, Hin Cheung, Annie and Tong, Jamie Yixing and Zhang, Feida and Zheng, Guojian, Corporate Governance, Product Market Competition and Managerial Incentives: Evidence from Four Pacific Basin Countries (January 30, 2015). 2015 Financial Markets & Corporate Governance Conference, Pacific-Basin Finance Journal, Vol. 40, No. B, 2016, Available at SSRN: https://ssrn.com/abstract=2557905 or http://dx.doi.org/10.2139/ssrn.2557905