Media Coverage, Executive Compensation Gap And Firm Risk

A high-quality company is an important foundation for national economic development. There are many factors will affect its construction. Among them, the most critical factor is human. Especially the selection and incentive of executives who guide business direction and formulate development strategy for a company. Therefore, as one of the means to attract and retain talents, the compensation incentive system is an important part in the field of corporate governance. Hard work should be rewarded is a common consensus. But only use the performance as the standard for the design of executives’ compensation, isn’t that too biased? Lazear Rosen (1981) put forward the concept of the tournament which to illustrate the incentive effect of compensation gap to executives, as well as the promotion impact to the company’s performance. However, the performance and the income is often accompanied with risks. The study of Goel and Thakor (2008) which based on the Nash equilibrium theory have found that the firm risk will be pushed up when executives want to win a promotion and a raise. Moreover, this thesis analyzed the course of the change in executives’compensation at home and abroad since 2007, the media has undoubtedly become an important factor affecting the government and the company’s decision-making. Since the financial crisis in 2007, to avoid more social problems, governments had to use the national financial fund to help those companies which were damaged heavily by the financial crisis. Meanwhile, the media reported that the compensation of some executives who came from those companies which received the help of the governments was an unbelievable high price. This had not only aroused public indignation, but also made governments issued "a compensation limit order’. So based on all the background above, this thesis learned all the existing relevant theories and research results both here and abroad, then put forward three questions. First, will the executive compensation gap affect the firm risk? Second, will the executive compensation gap respond to the negative media coverage? Third, what is the impact path among the negative media coverage, executive compensation gap and the firm risk? In order to answer these three questions, this thesis uses both theoretical analysis and empirical research to validate three hypothesis which is brought out according to those three questions. H1:The greater the executive compensation gap is, the higher the firm risk is. H2:The negative media coverage will lead to a decline in the executive compensation gap. H3:The negative media coverage will reduce the firm risk by reduce the executive compensation gap. For the empirical research, this thesis chose those companies which have been reported on compensation problem by the media from 2011 to 2014. The media data comes from the full text database of China’s important newspapers in CNKI. Other data comes from CSMAR database and the annual report of listing corporations. Then with the help of statistical analysis software this thesis finished data related analysis and regression analysis.The final results show that, first, the expansion of the executive compensation gap will increase the firm risk which verify the tournament theory and show the importance of a reasonable company compensation design. Second, the negative media coverage as an external supervision tool can supervise the executive compensation gap effectively. That is to say, when there are negative media coverage, the company would bow to the pressure from the public, and more likely to reduce the executive compensation gap. This obey the media bias theory and media governance theory. Third, the negative media coverage will reduce the firm risk by reduce the executive compensation gap. But it will also weaken the effect of the executive compensation gap on the firm risk.