Premium
Executive Compensation and Legal Investor Protection: Evidence from China's Listed Firms
Author(s) -
Zheng Zhigang,
Zhou LiAn,
Sun Yanmei,
Chen Chao
Publication year - 2016
Publication title -
review of development economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.531
H-Index - 50
eISSN - 1467-9361
pISSN - 1363-6669
DOI - 10.1111/rode.12209
Subject(s) - executive compensation , incentive , china , compensation (psychology) , private benefits of control , agency cost , control (management) , business , agency (philosophy) , order (exchange) , accounting , executive order , principal–agent problem , investor protection , finance , economics , microeconomics , law , corporate governance , management , political science , shareholder , psychology , philosophy , epistemology , psychoanalysis
This paper seeks to relate the increases in executive compensation observed in China to improvement of the legal environment. We build a simple model and demonstrate that improvement in legal investor protection reduces the manager's private benefits of control; in order to make the managerial incentives compatible, some of the forgone private benefits have to be compensated in the form of increased executive pay. Using a large dataset on Chinese listed corporations, we find strong evidence that improvement of the legal environment is significantly associated with both the rise in executive compensation and the reduction in agency costs, which is consistent with our model predictions.