The Impact Of Salary Control On The Risk Of Stock Price Collapse

This study focuses on the impact of the "salary limit policy" on the risk of stock price collapse for listed companies.Implemented since 2015,the policy specifies the calculation method and limits of compensation for senior managers of central and local state-owned enterprises and establishes a link between the compensation of top executives and that of ordinary employees.The policy directly affects executive compensation,resulting in changes in their behavior and fluctuations in company indicators compared to before the policy was introduced.Stock price collapse risk is an indicator used to assess the stability of a company’s stock price,reflecting the likelihood of sharp fluctuations in the company’s stock price over a period of time.This indicator is related to the content and frequency of information released by the company.If the company releases less information or does not include unfavorable changes,the stock price collapse risk is relatively low,and vice versa.This study is based on existing theories that executive compensation,as an important means of solving agency problems,has a significant impact on company value.Based on the effective incentive theory,increasing compensation can enhance company value,but the overconfidence hidden behind executive compensation can damage company value.The "salary limit policy" has also been shown to affect company performance.The effective compensation control theory holds that reducing the compensation gap can have a stimulating effect.However,the excessive control theory suggests that controlling compensation will cause executives to seek alternative methods.This thesis employs panel data from Chinese listed companies on the Shanghai and Shenzhen stock exchanges between 2009 and 2021 to investigate the negative correlation between executive compensation and the risk of stock price collapse.Using a difference-in-differences model,the study focuses on the impact of the compensation regulation policy,commonly known as the "salary cap," on the risk of severe fluctuations in stock prices,or stock price collapse.The empirical results reveal four main points:(1)the "salary cap" policy significantly increased abnormal fluctuations in stock prices and exacerbated the risk of stock price collapse,thus having a negative impact on listed companies;(2)the level of earnings management and on-the-job consumption were important channels through which the compensation regulation policy affected the risk of stock price collapse;(3)the education level of executives and the effectiveness of internal control played a moderating role in correlation between salary control and the risk of stock price collapse.The moderating effect of education level showed a U-shaped trend,indicating that increasing the education level of executives could have a positive effect on the company’s stability when the education level is low,but the effect would be opposite when the education level is high.Meanwhile,effective internal control can effectively counteract the negative impact of the policy on the company’s stock price.(4)The study further reveals that the response to the policy varies depending on the company’s location.Based on the empirical model and results,targeted policy recommendations are given for compensation regulation policy formulation and strengthening internal management.Finally,the chapter summarizes the limitations of this study and provides prospects for future research.The significance of this thesis lies in identifying the root cause of the internal compensation allocation issues within enterprises,which stems from the principal-agent relationship between executives and shareholders,as well as the effectiveness of internal control.Prior research has held different views on the incentive effect of executive compensation and the consequences of the "salary cap" policy.This thesis innovatively measures the policy’s implementation effect using the indicator of stock price collapse risk,providing a quantifiable metric.Additionally,the study reveals that a "one-size-fits-all" approach to compensation tends to induce executives to act selfishly,resulting in increased risk of stock price collapse.The results confirm that constructing a reasonable internal control system to restrain self-serving behaviors of executives can lead to lower risk of stock price collapse in the face of external shocks.This thesis contributes to theoretical advancements by summarizing and expanding on existing research,while providing empirical evidence for the formulation and implementation of compensation control policies in practice.It also offers empirical explanations for the necessity of building appropriate executive appointment systems and internal executive behavior monitoring mechanisms within enterprises,thus having certain research value.