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Executive Compensation, Firm Performance, and Corporate Governance in China: Evidence from Firms Listed in the Shanghai and Shenzhen Stock Exchanges

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Author Info
Kato, Takao
Long, Cheryl

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Abstract

This article provides evidence on how executive compensation relates to firm performance in firms listed in the Shanghai and Shenzhen Stock Exchanges in China. Using comprehensive financial and accounting data on China's listed firms from 1998 to 2002, augmented by unique data on executive compensation and ownership structure, we find for the first time statistically significant sensitivities and elasticities of annual cash compensation (salary and bonus) for top executives with respect to shareholder value in China. In addition, sales growth is shown to be significantly linked to executive compensation, and Chinese executives are penalized for making negative profits, although they are neither penalized for declining profits nor rewarded for rising profits insofar as profits are positive. Perhaps more important, we find that the ownership structure of China's listed firms has important effects on the pay-performance link in these firms. Specifically, state ownership of China's listed firms weakens the pay-performance link for top managers and thus possibly makes China's listed firms less effective in solving the principal-agent problem between owners and management. As such, ownership restructuring may be needed for China to successfully transform its state-owned enterprises (SOEs) into efficient modernized corporations and reform its overall economy.

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Publisher Info
Article provided by University of Chicago Press in its journal Economic Development and Cultural Change.

Volume (Year): 54 (2006)
Issue (Month): 4 (July)
Pages: 945-83
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Handle: RePEc:ucp:ecdecc:y:2006:v:54:i:4:p:945-83

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References listed on IDEAS
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Full references

Cited by:
(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Chi, Wei & Zhang, Haiyan, 2008. "Is Cross-listing Associated with Stronger Executive Incentives? Evidence from China," MPRA Paper 11649, University Library of Munich, Germany. [Downloadable!]
  2. Galina Hale & Cheryl Long, 2006. "FDI spillovers and firm ownership in China: labor markets and backward linkages," Working Paper Series 2006-25, Federal Reserve Bank of San Francisco. [Downloadable!]
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