Air pollution and executive incentive: Evidence from pay-performance sensitivity

Shuangli Yu, Yuxin Shen, Fan Zhang, Yongjian Shen and Zefeng Xu

International Review of Financial Analysis, 2022, vol. 82, issue C

Abstract: Based on the China's non-state-owned listed corporates in 2014–2020, we adopt the real-time air quality index data published by the Ministry of Environmental Protection of China as the proxy of air pollution to examine how air pollution affects firm's CEO pay–performance sensitivity (PPS). The results of logistic regression show that air pollution is negatively correlated with the executives' PPS. We also find that industrial and regional characteristics is heterogeneous by exploring the interaction effect of CEO. In addition, our study indicates that the influence of air pollution on PPS is more significant in companies with improved performance and we provide a possible explanation of this based on the theory of resource category equivalence. The mechanism test shows that air pollution increases the firms' difficulty to motivate executives, it also destroys the effectiveness of compensation contracts and significantly reduces the PPS by increasing explicit and implicit incentive. Furthermore, we investigate the economic consequences of air pollution. Results show that air pollution would damages the firm value directly and also affect their PPS. Overall, our study reveals how air pollution affects executives' incentive, therefore provides policy support to developing countries to balance the relationship between economic development and environmental protection.

Keywords: Air pollution; Executive incentive; Pay–performance sensitivity (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:finana:v:82:y:2022:i:c:s1057521922001740

DOI: 10.1016/j.irfa.2022.102213

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