Executive Compensation Stickiness And Enterprise Over-investment

In essence, the executive compensation is a way for modern enterprise to solvethe principal-agent problem, its fundamental purpose is to stimulate the managementof the company to make them work harder, and through promoting business valueultimately achieving the goal of shareholder wealth maximization, so the performancesalary system is regarded as the perfect salary system for the listed corporationspreferred. However, in recent years, the economic crisis causing the market shake,"avariety of exposure of high compensation" and the salary of chaos not only hit theconfidence of investors, but also make people to think and question the rationality ofthe performance salary system，which makes the study of executive compensationproblem become the focus of scholars concerning. During the period of2007-2013,executive compensation of the global listed Corporation has been sustainably grown.It is inconsistent with the decline of corporation’s performance and depressing globaleconomic environment, which means the performance salary system does not play agood role in constraint, only as a motivational tool reflected in the corporategovernance mechanism, so the executive compensation stickiness produced. So far,academic research about the "executive compensation stickiness" has made someachievements, but it still remains in the verification of the existence level, and littleresearch about the economic result of "executive compensation stickiness".Business investment is always an important financial behavior in the businessactivities of enterprises, and business investment efficiency is related to the survivaland development of enterprises, the frequent occurrence of over-investment behaviornot only leads to enterprise capital chain break and inefficient operation, but alsoaffects the social resources. Therefore, this paper focuses on how the existence of"executive compensation stickiness" in listed corporations affect over-investment.Meanwhile, due to the differences between internal and external factors in differententerprises, whether financing constraint and financial flexibility which used to copewith environmental uncertainty affect the relationship between "executivecompensation stickiness" and over-investment, this context will be considered in thestudy.basing on a theoretical analysis of "executive compensation stickiness" and actual situation of Chinese listed Corporation, the paper adopts measurement methodof "executive compensation stickiness" from Bu Danlu [2012] which used executivecompensation and corporate performance data of Shanghai, Shenzhen A share listedcorporations from2009to2013to measure the "executive compensation stickiness"degree, and empirically examines its influence on over-investment. At the same time,in order to ensure the comprehensiveness of the study, through adding financingconstraint and financial flexibility dummy variables, further analysis and testingwhether different conditions will affect the relationship between "executivecompensation stickiness" and over-investment has been done.The results of research show that:(1)"executive compensation stickiness"degree and over-investment level are positively correlated, which means increase ofexecutive compensation stickiness will enhance the senior executive’s spirit ofadventure, eventually exacerbating over-investment of enterprises. It embodies thatthe characteristics of listed corporations salary system can significantly affect theexecutive behavior.(2) Enterprise’s financing constraint will produce an effect on thecorrelation between" executive compensation stickiness" and over-investment, ascompared to firms with high financing constraint, the positive correlation betweenexecutive compensation stickiness and over-investment in the enterprises with lowfinancing constraint is more significant.(3) Financial flexibility play a regulatory roleon relationship between executive compensation stickiness and over-investment, thehigher of the degree of financial flexibility, the existence of executive compensationstickiness will aggravate enterprise over-investment. Meanwhile, different types offinancial flexibility have different effect on the relationship. The effect shows agradually increasing trend from cash flexibility, debt financing flexibility to mixedflexibility.