Executive Compensation, Firm Performance, and State Ownership in China: Evidence from New Panel Data*

Takao Kato and Cheryl Long ()

William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan

Abstract: This paper provides the first systematic evidence on compensation for executives of firms listed in China’s emerging stock market (currently the eighth largest of the world with market capitalization of over $550 billion). Specifically, using comprehensive financial and accounting data on China’s listed firms from 1998 to 2002 (data modeled after Compustat and CRSP in the U.S.), augmented by unique data on executive compensation, we find for the first time statistically significant sensitivities and elasticities of annual cash compensation (salary and bonus) for top executives with respect to shareholder value in China. The size of the estimated sensitivities imply that a 1000 RMB increase in shareholder value yields a 0.020 RMB to 0.053 RMB increase in annual cash compensation, whereas the size of the estimated elasticities suggest that a 10 percent increase in shareholder value results in 3.7 to 4.0 percent increase in annual cash compensation for top executives. The estimated sensitivities and elasticities of cash compensation for top executives in China’s listed firms are greater than what has been reported for Japan and the U.S. However, we also find that state ownership of China’s listed firms is weakening executive pay-performance link and thus possibly making China’s listed firms less effective in solving the agency problem. As such, ownership restructuring may be needed for the “shareholding experiment” to fully succeed in transforming China’s emerging listed firms to efficient modernized corporations and for the overall successful economic transition of China. Finally, we find that sales growth is significantly linked to executive compensation and that Chinese executives are penalized for making negative profit although they are neither penalized for declining profit nor rewarded for rising profit insofar as it is positive.

Keywords: transition economies; China; executive compensation; firm performance; corporate governance; and ownership structure. (search for similar items in EconPapers)
JEL-codes: G15 G30 J33 M12 M52 O53 P31 P34 (search for similar items in EconPapers)
Pages: 39 pages
Date: 2004-05-01
New Economics Papers: this item is included in nep-fin, nep-lab, nep-sea and nep-tra
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

Downloads: (external link)
http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp690.pdf
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.wdi.umich.edu/files/Publications/WorkingPapers/wp690.pdf [302 Found]--> https://wdi.umich.edu/files/Publications/WorkingPapers/wp690.pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:wdi:papers:2004-690

Access Statistics for this paper

More papers in William Davidson Institute Working Papers Series from William Davidson Institute at the University of Michigan 724 E. University Ave, Wyly Hall 1st Flr, Ann Arbor MI 48109. Contact information at EDIRC.
Bibliographic data for series maintained by WDI ().