Parent-Subsidiary Dispersion and Executive Excess Perks Consumption

Abstract

We investigate the impact of parent-subsidiary dispersion on the corporate executives’ excess perks consumption using comprehensive data of 1,784 Chinese listed firms over the 2003–2017 period (i.e., total firm-year observations of 24,976). We argue that firms with greater geographic and institutional environment dispersion are subject to an acute information asymmetry problem, which makes it difficult and costly for shareholders and the public to monitor managerial actions and hence, facilitates managers to consume perks excessively. Consistent with this assertion, we find a positive relationship between parent-subsidiary company dispersion and executives’ excess perks consumption. These patterns are not likely to be driven by the firms’ endogenous choice and remain robust to various proxies for parent-subsidiary dispersion and executives’ excess perks consumption. In addition, our results also show that firms with a greater dispersion between parent and subsidiary companies have higher investor recognition. However, investor recognition does not appear to negatively impact the rate of executives’ excess perks consumption, which may explain why executives’ excess perks consumption is not mitigated in firms with greater parent-subsidiary dispersion.

Keywords: Parent-subsidiary dispersion; corporate executives; excess perks; information asymmetry; investor recognition

JEL Classification: G12; G14; G30; G32