The Empirical Research On The Stickiness Of Executive Compensation And Corporate Overinvestment

Investment is one of the primary factors of the corporate creating value and the national economic growth.However,the investment of Chinese corporate commonly shows in inefficient state.Some companies' investment produces the phenomenon of overinvestment or underinvestment.Because of agency problems,the results of companies'investment are not always reflected in maximizing the corporate value.On one hand,it hurts the interests of shareholders,on the other hand affects the capital market's efficient allocation of resources.In Optimal Contract theory,the executive compensation is the increasing function of corporate performance.However,there's stickiness in executive compensation listed companies in China.The stickiness of executive compensation weakens corporate effective compensation incentive and results in the waste of enterprise resources in part.In this paper,we propose the research framework of the stickiness of executive compensation and corporate overinvestment,on the basis of a systematic review of the Principal-agent theory,Optimal Contract theory,Managerial power theory and other theory,and on the basis of summarizing the research results of the scholars at home and abroad,on executive compensation and corporate performance and corporate inefficient investment.Firstly,we use Richardson's(2006)investment expectation model to measure corporate overinvestment and quantify the stickiness of executive compensation.Then we do empirical research on the stickiness of executive compensation and corporate overinvestment.It concludes that greater stickiness of executive compensation leads to more serious corporate overinvestment.Because of the stickiness of executive compensation,there's little or no risk for executives,and reduce their private cost of increasing investment.Thus it makes executives prone to invest and corporate overinvestment.Further differentiating the actual control state,this positive effect is more signifi cant in state-owned firms than in private firms.It's mainly due to the policy burden the state-owned firms hold and executives encouraged by political promotion and h idden benefits that increases the incentive to overinvest.Simultaneously,this positive effect is more significant in local-government-controlled firms compared to central-g overnment-controlled firms.It shows that this positive effect in state-owned firms m ore reflected in local-goverrnment-controlled firms.We can learn that rules concernin g executive compensation in state-owned enterprises supervised and managed by the central government and investment scale issued by State-owned Assets Supervision and Administration Commission of the State Council have played a certain role.According to the above research findings,this paper puts forward some suggestions.First,improve executive compensation mechanism.It concludes optimizing the structure of executive compensation,strengthening long-term incentives,establishing a reasonable performance evaluation mechanism,increasing transparency of the salary contract and so on.Secondly,improve the internal management structure.It concludes perfecting Independent Director System and enhancing the independence of independent directors.The government should gradually reduce the degree of intervention in the state-owned firms and enhance their awareness of market competition.Local SASAC should improve effective management,regulate and guide local-government-controlled firms to invest.Last,perfect manager market,including establishing a scientific manager occupation evaluation system and the introduction of market competition mechanism.