Political Connected, Executive Incentive And Capital Structure

With the development of corporate governance, theorists and practitioners pay more and more attention on the issue of executive incentive. Executives are managers and decision-makers, their behaviors relate to the fate of the enterprise closely. Howeve, as natural person who have economic rationality essentially, professional executives’decisions will be affected by their own interests inevitably, which would make their ultimate goal be the maximization of individual interests under a certain constraint, rather than the maximization of enterprise value sometimes. When the compensation contracts can not meet the needs of executives, because of poor corporate governance, executives will choose their own financial policies, to seek their own interests at the expense of the shareholders’ interests. In order to alleviate the principal-agent problem between shareholders and managers, enterprises incentive executives. This paper analyzes the effectiveness of executive incentive from the perspective of financial policy. Firstly, this paper open Enterprise "black box", to explore the relationship between executive incentives and capital structure. Secondly, this paper also goes out of the "black box", to study the influence of political connected between executive incentive and capital structure. This paper not only offers help to improve executives incentives mechanism in our country, but also has great theoretical and practical significance to the healthy development of market economy.This paper uses a large simple of enterprises listed in Shanghai and shenzhen during the period2007-2012. By theoretical analysis and empirical research, the results show that there is a significant non-monotonic relationship between executive incentive and capital structure. There is a significant inverted U nonlinear relationship between cash compensation incentive and capital structure. Obtained within a certain range, the higher the executive pay, the more inclined to high debt capital structure decision, but when the incentive level has reached a certain degree, managers can reduce corporate debt levels. There is a significant U nonlinear relationship between equity incentive and capital structure. Obtained within a certain range, the higher the executive pay, the more inclined to high debt capital structure decision, but when the incentive level has reached a certain degree, managers can reduce corporate debt levels. The greater the proportion of executives shareholdings, the more inclined to low debt capital structure decision, but when reaches a certain degree, the manager will raise the debt level. There is also strong evidence suggesting that political connected have a significant impact on the relationship between stock incentive and capital structure. More importantly, the results reveal that the impact of political connected on the relationship between executive incentive and capital structure depends on the enterprise nature. In private enterprises, political connected has significant influence on the relationship between equity incentive and capital structure. In state-owned enterprise, political connected has significant influence on the relationship between cash compensation incentive and capital structure.Finally, this paper gives some suggestions according to the conclusions from the perspective of enterprise and government. On the one hand, enterprises should strengthen the information disclosure of listed companies and establish effective incentive scheme. On the other hand, government departments should reduce the market intervention, respect for the market discipline, create a good atmosphere for market.