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Executive incentive compatibility and selection of governance mechanisms
Author(s) -
Xu Rong,
Zhang Guangli,
Zhang Junyan,
Zheng Zhigang
Publication year - 2020
Publication title -
accounting and finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.645
H-Index - 49
eISSN - 1467-629X
pISSN - 0810-5391
DOI - 10.1111/acfi.12323
Subject(s) - corporate governance , executive compensation , incentive , compatibility (geochemistry) , business , empirical evidence , incentive compatibility , accounting , microeconomics , economics , finance , engineering , philosophy , epistemology , chemical engineering
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.