Check-and-balance Of Ownership,ownership Nature And CEO Incentives

How to alleviate the agency conflict between shareholders and CEO is a critical issue in corporate governance research.CEO compensation incentive can enhance both benefit-sharing and risk-sharing between shareholders and CEOs,which is often considered to be the key to stimulate CEO motivation and improve enterprise vitality(Jensen and Meckling,1976).With the promotion of China's modern enterprise system construction,governance mechanisms such as executive compensation information disclosure and compensation committee have been gradually enhanced,creating a good corporate governance environment for Chinese listed firms to implement CEO compensation incentive.Since the split share structure reform,the stock liquidity of listed companies has been improved,relevant laws and regulations on equity incentive have been issued one after another,which has created conditions for Chinese listed firms to formulate and implement CEO equity incentive.The data shows that CEOs who hold firm equity account for43.69%.However,most existing studies on CEO compensation in China only consider CEO cash compensation and ignore firm equity held by CEOs.This practice may dramatically underestimate CEO incentive level and cause endogenous problem from measurement error.Therefore,in the first empirical part,we make a comprehensive quantitative evaluation of the CEO compensation incentive level in the Chinese listed firms.We collect and calculate CEO compensation incentives from cash compensation,stock compensation,and option compensation.On this foundation,we examine whether the practice of CEO compensation incentive in China conforms to the three basic inferences of the classic principal-agent model(H(?)lmstrom,1979;H(?)lmstrom,1982;H(?)lmstrom and Milgrom,1987),providing empirical evidence for the effectiveness of CEO compensation contracts and quantitative data support for the research on CEO compensation incentive in the Chinese listed firms.In addition to measurement errors,ownership structure characterized by "sole majority shareholder," split share structure,and state-ownership dominance is considered an essential reason for the relatively weak CEO compensation incentive in Chinese listed firms.Wherein "sole majority shareholder" and split share structure leads to ineffective checks and balances in equity,increases the possibility of controlling shareholder tunneling,reduces the measuring accuracy of firm performance,and then weakens the association between CEO pay and the firm performance.However,with the implementation of relevant policies to promote the healthy development of the capital market,the split share structure has been gradually eliminated.The "sole majority shareholder" has gradually changed into the coexistence of controlling shareholders and non-controlling large shareholders(NLSs).In this context,it is necessary to re-examine the impact of equity balance characteristics on CEO compensation incentives in Chinese listed firms.In view of the widespread of NLSs in China's listed companies,and they may directly affect CEO compensation incentives by putting forward or voting on CEO compensation related proposals(blockholder "Voice")or by selling or threatening to sell shares(blockholder "Exit" or " Threat of exit")indirectly affect CEO compensation incentives,the second empirical part studies the impact of NLSs on CEO compensation incentives,based on the theory of blockholder.It explores the causal link between ownership structure and CEO compensation incentives in Chinese listed firms from equity balance.As for the phenomenon of state-owned equity dominance,domestic scholars have analyzed the possible impact of state-ownership on CEO compensation incentives based on the multi-objective theory and the soft budget constraint theory of state-owned enterprises.However,the existing studies have not systematically empirically examined whether state-ownership has a causal effect on CEO compensation incentives.It is mainly because observable and unobservable differences between SOEs and non-SOEs increase the difficulty of causal identification.It is worth noting that firm ultimate controlling party transforms from the state to the private(hereafter,privatization)from time to time,as the advancement of China's enterprise market-oriented reform.In the privatization process,the soft budget constraints and the absence of owners have been alleviated.At the same time,CEO compensation contracts are often redesigned,making it possible to identify the impact of state-ownership on CEO compensation incentives empirically.Therefore,the third empirical studies the effect of state-ownership on CEO compensation incentives,based on the multi-objective theory of state-owned enterprises and the soft budget constraint theory.It explores the causal link between ownership structure and CEO compensation incentives in Chinese listed firms from equity nature.The main findings and conclusions of this paper are as follows:First,stock compensation is the main source of CEO compensation incentives in the Chinese listed firms,which provides more than 99% of the pay-performance sensitivity.Thus,the neglect of equity compensation in previous studies may lead to serious underestimation of CEO pay-performance sensitivity.After correcting the measurement bias of CEO compensation incentives caused by the omitting equity compensation,CEO compensation incentives in the Chinese listed firms conforms to the three basic inferences of principal-agent theory,that is,the positive CEO payperformance sensitivity,CEO compensation contracts have relative performance evaluation,and reflect the trade-off between CEO incentives and firm risk.It preliminarily reflects the effectiveness of CEO compensation contract,affirms the applicability of the principal-agent model in CEO compensation contract,and has theoretical and practical guidance for the design and practice of CEO compensation incentive scheme of Chinese listed firms.Second,the cash flow rights and voting rights of non-controlling shareholders significantly improve CEO compensation incentives.Controlling shareholder dominance and insider control are prominent,and CEO compensation incentive is relatively weak in China.Under this background,this study shows that NLSs help alleviate the agency conflict between shareholders and CEOs and increase the possibility of CEO against potential controlling shareholder tunneling.Thus,it provides practical guidance for designing and improving ownership structure and governance structure in Chinese listed firms.Further studies show that the positive effect of non-controlling shareholder voting rights(cash flow rights)on CEO compensation incentives is more prominent(weaker)in firms with more executive compensation resolutions at the general meeting of shareholders(controlling shareholder control rights and cash flow rights separating and poor stock liquidity).It provides preliminary empirical evidence for the "Voice"("Exit" or "Threat of exit")mechanism that non-controlling shareholders affect CEO compensation incentives.In addition,after carefully distinguishing the identity of large shareholders,this paper finds that different types of NLSs tend to choose different governance mechanisms,and identity similarity between controlling shareholder and NLSs will increase the possibility of their "collusion",reducing the governance efficiency.Therefore,this study has strong theoretical and practical guidance for the relevant research on NLS governance in China.Third,state-ownership weakens CEO pay-performance sensitivity.CEO compensation incentives develop highly unbalanced in China and fail to stimulate the talents and enthusiasm of CEOs in SOEs effectively.Under this background,we show that state-ownership weakens the sensitivity of CEO pay to firm performance,intensifying the agency conflicts between shareholders and CEOs.It reveals the implication of market-oriented reform from corporate governance.Also,it provides practical and policy guidance for executive compensation reform and SOE reform.Further study shows that the negative impact is more prominent in SOEs with higher state share ratios and municipal SOEs.It provides empirical evidence for the research on the agency problem of SOEs under the government fiscal decentralization and has practical guidance for SOE reform policy-making.In addition,by investigating CEO turnover during the privatization,we find that privatized SOEs increase the proportion of politically connected CEOs and external CEOs,revealing the strategic change of privatization while maintaining the connection with the government.It has theoretical and practical implications for the relevant research of privatization.The innovation of this paper is mainly in the following ways:First,in view of the defects of existing studies in the statistical scope and measurement methods of CEO compensation in China,this paper re-estimates the CEO compensation incentive level.It not only improves the measurement accuracy,but also alleviates the endogenous problem caused by measurement deviation.This paper overcomes the defects in the statistical scope and measurement methods of CEO compensation in China,collects and calculates the incentive level provided by various possible incentive mechanisms to CEO in detail,including cash compensation,inside shareholding,restricted stock and stock option.The data obtained can not only better reflect the current situation of CEO compensation incentive in the Chinese listed firms,but also provide quantitative data support for the follow-up research on CEO compensation incentive.On this basis,it is more credible to analyze the effectiveness of CEO compensation contract.In addition,since the "Voice" and the "Exit" or "Threat of exit" mechanism of NLS governance,soft budget constraints of state-owned enterprises and absence of owners all directly or indirectly affect CEO equity incentive,based on the data of this paper,studying the impact of NLSs and state-ownership on CEO compensation incentives will help to alleviate the endogenous problem caused by measurement deviation.At the same time,it also provides the possibility to analyze their influence mechanisms.Second,in view of the shortcomings existing in the previous research,(such as ignoring the development and change of the checks and balances in the Chinese listed firms,and the lack of empirical test on the impact of the equity checks and balances on CEO compensation incentives)this paper combined with the elimination of China's split share structure and the transformation from "dominance of one share" to the coexistence of controlling shareholders and NLSs,systematically studies the impact of NLSs on CEO compensation incentives.Considering that most existing studies in China have failed to effectively distinguish the governance mechanism of NLSs,this paper constructs Shapley value to distinguish the cash flow right measured by shareholding ratio from the voting right measured by Shapley value,and analyzes the regulatory effects of executive compensation(incentive)resolution of the general meeting of shareholders,separation of two rights of controlling shareholders and stock liquidity.The findings provide preliminary empirical support for the "Voice" and the "Exit" or "Threat of exit" mechanism of NLS governance.This paper also takes into account the heterogeneity of the identity of large shareholders,and further explores the impact of NLSs with different identities on CEO compensation incentives,as well as the differences in the impact of NLSs on CEO compensation incentives when the similarity of identities between controlling shareholders and NLSs are different.It provides new empirical evidence for the study of the heterogeneity of the identity of large shareholders.Thirdly,in view of the difficulty in identifying the causal relationship caused by the observable and unobservable differences between SOEs and Non-SOEs,the lack of empirical research on the causal relationship between equity nature and CEO compensation incentives in the existing literature,this paper selects the privatization event of SOEs to systematically study the impact of state-ownership on CEO compensation incentives.The privatization of SOEs often occurs in China's listed firms.In the process of privatization,the problems such as soft budget constraints and the absence of owners are alleviated,and the implicit income and implicit incentive are reduced.At the same time,CEO compensation contracts are often redrafted.It creates conditions for empirically testing the state-ownership on CEO compensation incentives.Based on the privatization of SOEs,combined with propensity score matching,parallel trend hypothesis test and difference-indifference model,this paper better identifies the causal relationship between stateownership and CEO compensation incentives,provides empirical support for the impact of state-ownership on CEO compensation incentives,and expounds the implication of enterprise marketization reform from the perspective of corporate governance.This paper also further investigates the changes of CEO's political connection and employment source during privatization.It is helpful to understand the privatization transformation of firms and enrich the relevant research on privatization.