Controlling shareholders' incentives and executive pay-for-performance sensitivity: Evidence from the split share structure reform in China
Document Type
Article
Date of Original Version
1-1-2015
Abstract
Using the split share structure reform in China as a natural experiment, we study how changes in controlling shareholder incentive affect the pay-for-performance sensitivity. The reform converts the shares owned by controlling shareholders from non-tradable to tradable shares. The removal of such market friction allows for a better alignment of interests between controlling and minority shareholders, which gives managers more incentives to improve corporate performance. We find that the pay-for-performance sensitivity improves greatly after the reform. Changes in the pay-for-performance sensitivity are also associated with firm ownership structure, the level of agency conflicts and governance quality. Given that firms with controlling shareholders are the dominant form of business organization in many countries around the world, our results have important implications in that they show that a better alignment between controlling and minority shareholders' incentives has a significant effect on executive compensation.
Publication Title, e.g., Journal
Journal of International Financial Markets, Institutions and Money
Volume
34
Citation/Publisher Attribution
Chen, Shenglan, Bingxuan Lin, Rui Lu, and Ting Zhang. "Controlling shareholders' incentives and executive pay-for-performance sensitivity: Evidence from the split share structure reform in China." Journal of International Financial Markets, Institutions and Money 34, (2015): 147-160. doi: 10.1016/j.intfin.2014.10.003.