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Controlling Shareholders' Tunneling and Executive Compensation: Evidence from China

时间:2010.11.15

Kun WANG
School of Economics and Management
Tsinghua University
Beijing, China (100084)
TEL: 86-10-62795167
FAX: 86-10-62783540
Email: wangk@sem.tsinghua.edu.cn

Xing XIAO
School of Economics and Management
Tsinghua University
Beijing, China (100084)
TEL: 86-10-62795464
FAX: 86-10-62783540
Email: xiaox@sem.tsinghua.edu.cn

Abstract
Conflict of interests between controlling shareholders and minority share holders could affect executive compensation contracts. In this paper, we use data on Chinese listed companies and show that controlling shareholders’ tunneling reduces the pay-performance sensitivity of executive compensation. These results suggest that while incentive payment schemes are generally adopted in Chinese listed companies, controlling shareholders who obtain private benefits from listed companies have less incentive to strengthen the relationship between executive pay and firm performance. 
 
JEL classification: G32; J33; M52
 
Keywords: Controlling shareholder; Tunneling; Pay-performance sensitivity; Executive compensation

1.  Introduction 
Performance-based incentive payment schemes provide a crucial mechanism to alleviate the classic owner-manager conflict as described by Berle and Means (1932) and Jensen and Meckling (1976). The conventional wisdom is that the presence of a blockholder could strengthen the pay-performance sensitivity of executive compensation, as a large stake in the company motivates the blockholder to monitor managers through incentive compensation contracts (Hartzell and Starks, 2003). A well-known feature of the ownership structure of Chinese listed companies is that ownership is highly concentrated. Previous studies, however, find that the link between executive compensation and firm performance is weak in China compared to that in developed markets such as the U.S. (Firth et al., 2006). 
 


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