Limits on executive pay and stock price crash risk: Evidence from a quasi-natural experiment

Min Bai, Renxiang Wang, Chia-Feng (Jeffrey) Yu () and Jianming Zheng

Pacific-Basin Finance Journal, 2019, vol. 55, issue C, 206-221

Abstract: By employing the mandatory pay ceiling regulation for top executives in Chinese state-owned enterprises (SOEs) as a quasi-natural experiment, we investigate how limits on executive pay affect firm-specific stock price crash risk. We find that executive pay restriction has an asymmetric impact on crash risk for different types of SOEs. Specifically, while this regulation has no significant impact on crash risk for central SOEs, it significantly increases crash risk for local SOEs. Further, this positive relationship is more pronounced for firms with weaker corporate governance, for firms with CEOs having longer tenure, older ages, and political positions, and for firms with executives losing more salary from this regulation. Overall, our findings identify a novel and unintended consequence in curbing executive remuneration and highlight the importance of distinguishing between different state ownership types.

Keywords: Executive pay restriction; Stock Price crash risk; State-owned enterprises; Political ranks (search for similar items in EconPapers)
JEL-codes: G32 G38 J33 (search for similar items in EconPapers)
Date: 2019
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Citations: View citations in EconPapers (8)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:pacfin:v:55:y:2019:i:c:p:206-221

DOI: 10.1016/j.pacfin.2019.04.003

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