Controlling shareholders’ incentives and executive pay-for-performance sensitivity: Evidence from the split share structure reform in China

Shenglan Chen, Bingxuan Lin, Rui Lu and Ting Zhang

Journal of International Financial Markets, Institutions and Money, 2015, vol. 34, issue C, 147-160

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.

Keywords: Corporate governance; Controlling shareholders; Pay for performance; China market (search for similar items in EconPapers)
JEL-codes: G3 (search for similar items in EconPapers)
Date: 2015
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Citations: View citations in EconPapers (18)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:intfin:v:34:y:2015:i:c:p:147-160

DOI: 10.1016/j.intfin.2014.10.003

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