The Effect Of CEO Compensation Deviation On Firm Risk Taking

Executive compensation as an important part of the corporate governance mechanism has a vital important function to the business performance and future development of the corporation. At present, various researches regarding the executive compensation have been conducted, but still some limitations have been found after summarizing these researches. Firstly, domestic scholars have previously focused on the direct investigation of executive compensation to the firm performance and the internal mechanism between them has been not yet explained clearly. But in recent years, more and more international scholars have tried to open the black box according to the prospect theory and they have found that firm risk taking may help to explain this problem which brings a new research perspective for this paper. Secondly, most of the domestic and international scholars mainly focus on the absolute level of executive compensation. Few researches have only analysed the compensation deviation between top management team. Comprehensive examine and proof of the executive compensation is insufficient. According to the theory of soicial comparison, individuals prefer to compare with similar individuals before evaluating themselves, thereby forming a type of cognition which will effect the individuals’decisions. As the reference used in the study of executive compensation, we may safely draw the conclusion that these executives make a comparison not only with themselves but also similar executives. Therefore, this paper attempts to compare executive compensation with other executive’s compensation in the same industry besides executive’s previous compensation and then comprehensively discuss their functional mechanism to firm value. Thirdly, most of the scholars have defined the "executive" in a vague manner which caused the persuasion of the research conclusion is weakened. This study thinks that along with separation between the modern enterprise ownership and operation, principal agent is formed. The CEO of listed company can implement the absolute influency for the company’s strategic and management decision. The risk attitude of the CEO’s directly reflects risk behavior of the firm. In conclusion, the CEO as a representative of the top management team is chosen to the main research object. This paper makes an empirical research on the relationship between executive’s historical and industrial compensation deviation and firm performance based on principal-agent theory, prospect theory and social comparison theory, in order to make up for the inadequacy of existing research.Based on the 267 Chinese high-tech listed companies including 113 state-owned companies and 154 non-state-owned companies from 2009 to 2013, we empirically tested the relationship between CEO compensation deviation and firm risk taking respectively in accordance with full samples, state-owned companies and non-state-owned companies subsample by STATA. The study found that CEO of positive compensation deviation showed a significantly negative correlation with firm risk taking, whereas, negative one a positive correlation, thus more sensitive when the historical compensation served as a reference point. Also, similar results were obtained when the firm average compensation referenced. Compared with non-state-owned companies, insider control and non-income compensation in state-owned companies made its CEO more risk aversion. Therefore, the research deepened the prospect theory in executive compensation incentive in the listed companies, especially provided some reference for the mechanism design in state-owned ones.