| As one of the means to alleviate the principal-agent problem,the intrinsic logic of CEO compensation contract formulation lies in aligning the interests of management and shareholders through the arrangement of compensation contract,which in order to alleviate managerial unethical behavior.However,in recent years,the sky-high compensation of CEOs of listed companies against the market pattern has triggered widespread concern from academics,investors,media,and regulators about the effectiveness of managerial compensation incentives.There are two competing theories regarding CEO compensation incentives: the optimal contract theory and the managerial power theory.However,no matter from the traditional corporate governance perspective or the emerging literature on the influence factors of CEOs’ compensation incentives from the perspectives of managers’ personal characteristics and company’s geographic factors,there is evidence to support both the managerial power theory and the optimal contract theory.Therefore,it is of great theoretical and practical significance to further study the influencing factors of CEOs’ compensation incentives in listed companies and assess their effectiveness to improve the compensation incentive mechanism of managers in listed companies in China.The corporate finance literature on CEO compensation is mainly based on the market equilibrium model,which generally assuming that the CEO market is nationwide.Thus,this model ignored the influence of geographical factors,such as CEOs’ birthplace,on CEOs’ compensation level and compensation incentive effect.Whether the CEO’s hometown is consistent with the company’s location will produce differences in hometown identities.Sociological and psychological studies have shown that the reciprocity,altruism,and preference caused by identity will change the individual’s utility function and decision-making choices.CEOs’ hometown identity recognition as a social and cultural factor,may be ignored by the neoclassical compensation model,which provides a new theoretical explanation for solving the puzzle of CEOs’ high compensation.Therefore,this paper study the factors affecting CEOs’ compensation levels through a new perspective of nonlocal CEOs based on identity theory.Nonlocal CEOs are defined as those who work for company located outside of their hometown.Further analysis of nonlocal CEOs’ influence on ROA,Tobin’s Q,pay performance sensitivity,perks and excessive pay provide new empirical evidence for the optimal contract theory or manager power theory.Based on related literature and theories,this paper first constructs a compensation incentive model that introduces CEOs’ hometown identity and finds that there is a substitution effect between hometown identity and monetary compensation,and when hometown identity is low,CEOs need higher compensation incentives and the firm’s value is lower.Based on the model,this paper further analyzes the mechanism of the impact of differences in hometown identity on CEOs’ pay incentives as reflected by CEOs’ off-site employment,i.e.,because of the lack of identity of the company’s location,the psychological cost and reputational constraints of self-interested behavior of nonlocal CEOs will be lower,and thus they will engage in more rentseeking through pay premiums.Based on the theoretical and model analysis,this paper uses the data of Chinese listed companies from 2005 to 2021 and empirically test how CEOs’ locality influence the compensation level and the effectiveness of compensation.Empirical results show that nonlocal CEOs receive almost 14.9%higher monetary compensation than their local peers.Considering the endogeneity problems such as omitted variables and reverse causality,this paper uses methods such as firm fixed effects,industry and province fixed effects over time,two-stage least squares regression,PSM matching analysis,and CEO turnover analysis.To further verify the robustness of our results,this paper conducts multiple robustness tests.These results all remain robust,indicating that nonlocal CEOs receive higher compensation than their local peers.To further prove whether nonlocal CEOs’ pay premium are effective pricing under the optimal contract theory or rent-seeking behavior from the perspective of manager power theory,this paper empirically explores the impact of CEOs’ locality on corporate financial performance and market value.The results indicate that the financial performance and market value of the companies with nonlocal CEOs are significantly lower than companies hiring local CEOs.At the same time,nonlocal CEOs have lower pay performance sensitivity,higher agency costs and higher excessive pay,indicating that the pay premium of nonlocal CEOs are more consistent with manager power view.Lastly,this paper further discusses whether nonlocal CEOs’ inefficient pay premium can be moderated by corporate governance and CEO labor market.In terms of corporate governance,empirical tests have found that institutional investors,a higher proportion of independent directors and larger board size can effectively restrict the rent-seeking behavior of nonlocal CEOs.In terms of CEO labor market,when the supply of CEOs in the company’s location is sufficient and the livability of the company’s location is high,the company can take the initiative in compensation contract negotiations,which can effectively inhibit the rent-seeking behavior of nonlocal CEOs through demanding high pay.The possible contributions of this paper are as follow: First,this paper breaks premise that the managerial market is national wide and includes the consistency of CEOs’ hometown and the address of the listed company into the consideration of CEO compensation incentive level and incentive effect,which is an extension and enrichment of CEO compensation incentive research;Second,by analyzing the influence of hometown identity on CEOs’ social preferences and behavioral decisions based on identity theory,this paper explains the principal-agent problem in nonlocal CEOs’ compensation premiums,and proposes cultural geography and social behavioral factors as new perspective and influencing factors for the managerial power theory in executive compensation research;Third,this paper considers the rent-seeking problem of nonlocal CEO’ pay premiums from the perspective of identity,provides evidence that geographic factors may bring agency problems,and provides a new way of thinking for the study of the principal-agent perspective in the Chinese context. |
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