Executive incentive compatibility and selection of governance mechanisms

Rong Xu, Guangli Zhang, Junyan Zhang and Zhigang Zheng

Accounting and Finance, 2020, vol. 60, issue 1, 535-554

Abstract: Executive incentive compatibility plays a crucial role in firm's selection of corporate governance mechanisms. We provide a simple model to explain why firms with enough executive incentive compatibility still prefer having external governance mechanisms, and firms with poor executive incentive compatibility have to rely on a combination of large investors monitoring and external governance. This model facilitates a better understanding of the co‐existence of the two governance mechanisms and also reconciles conflicting findings with respect to a substitutive and complementary relationship between the two governance mechanisms. Empirical evidence supports there is a substitutive relation between large investors monitoring and executive compensation.

Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:bla:acctfi:v:60:y:2020:i:1:p:535-554

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