Executive Compensation and Corporate Investment in China: What Determines Them and Are They Related?

Abstract

This thesis mainly examines three empirical studies. Firstly, it examines the relation between company ownership attribute and the executive compensation gap between market level and actual level. Secondly, it examines the relation between company ownership attribute and firms’ inefficient investment behaviors. Finally, it examines the relation between executive compensation gap, between market level and actual level, and firms’ inefficient investment behaviors. Based on Chinese listed companies with data from 2005 to 2012, the thesis finds that: 1) SOE attribute (whether central or local) increases the gap between executives’ actual compensation and market determined compensation levels. 2) SOE attribute has a significantly positive influence on a firm’s unexpected investment. With other conditions controlled, SOEs invest more than non-SOEs; furthermore, SOE attribute drives firms to make more investments. Meanwhile, although local SOEs invest more than other firms, central SOE attribute does not have a significant relationship to a firm’s level of unexpected investment. 3) A significant and positive relation between the extent of compensation regulation and the degree of a listed SOE’s overinvestment. These findings reveal that compensation regulation will cause severe agency problems in SOEs. The underpayment of executives in SOEs will not only cause overinvestments but also will devalue firm value of Chinese listed SOEs finally. This thesis contributes to existing literatures by providing a new way to study the correlation between executive compensation and firm investment behaviors. It also provides solid evidence that helps us to understand the consequences of distorted incentive mechanisms in Chinese listed SOEs experiencing government intervention, an issue that has been neglected in previous researches. The implications of this thesis’s findings are important to both corporate governance practitioners and policy makers as well.