IDEAS home Printed from https://ideas.repec.org/a/eee/ecmode/v151y2025ics0264999325002081.html

Minority shareholders protection and executive compensation contract effectiveness: Evidence from the establishment of the China Securities Investor Service Center

Author

Listed:
  • Zhang, Xiang
  • Xu, Chongjie
  • Li, Hongzhan

Abstract

This study examines the governance effect of minority shareholders from the perspective of executive compensation stickiness. Taking the China Securities Investor Service Center's (ISC) execution of shareholder rights as a quasi-natural experiment, with a sample from China's A-share listed companies from 2013 to 2022, our findings reveal that ISC shareholder rights enforcement significantly reduces executive compensation stickiness. This is achieved through increased external attention, which mitigates information asymmetry, and by curbing tunneling behavior from controlling shareholders. Further analysis highlights that the impact of ISC enforcement is more pronounced for firms with lower external auditor monitoring, less developed legal environment, lower institutional ownership, and higher managerial power. These findings underscore the ISC's role in enhancing corporate governance and protecting minority shareholder benefits, offering policy implications for strengthening investor rights and regulatory oversight mechanisms.

Suggested Citation

  • Zhang, Xiang & Xu, Chongjie & Li, Hongzhan, 2025. "Minority shareholders protection and executive compensation contract effectiveness: Evidence from the establishment of the China Securities Investor Service Center," Economic Modelling, Elsevier, vol. 151(C).
    • Handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325002081
    DOI: 10.1016/j.econmod.2025.107213
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0264999325002081
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.econmod.2025.107213?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to

    for a different version of it.

    References listed on IDEAS

    as
    1. Liu, Qiao & Lu, Zhou (Joe), 2007. "Corporate governance and earnings management in the Chinese listed companies: A tunneling perspective," Journal of Corporate Finance, Elsevier, vol. 13(5), pages 881-906, December.
    2. Core, John E. & Guay, Wayne & Larcker, David F., 2008. "The power of the pen and executive compensation," Journal of Financial Economics, Elsevier, vol. 88(1), pages 1-25, April.
    3. Bebchuk, Lucian Arye & Fried, Jesse & Walker, David I, 2002. "Managerial Power and Rent Extraction in the Design of Executive Compensation," CEPR Discussion Papers 3558, C.E.P.R. Discussion Papers.
    4. La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei & Vishny, Robert, 2000. "Investor protection and corporate governance," Journal of Financial Economics, Elsevier, vol. 58(1-2), pages 3-27.
    5. Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
    6. Shleifer, Andrei & Vishny, Robert W, 1997. "A Survey of Corporate Governance," Journal of Finance, American Finance Association, vol. 52(2), pages 737-783, June.
    7. Adra, Samer & Barbopoulos, Leonidas G., 2018. "The valuation effects of investor attention in stock-financed acquisitions," Journal of Empirical Finance, Elsevier, vol. 45(C), pages 108-125.
    8. Yu, Shuangli & Shen, Yuxin & Zhang, Fan & Shen, Yongjian & Xu, Zefeng, 2022. "Air pollution and executive incentive: Evidence from pay-performance sensitivity," International Review of Financial Analysis, Elsevier, vol. 82(C).
    9. Chen, Xing & Wu, Chongfeng, 2022. "Retail investor attention and information asymmetry: Evidence from China," Pacific-Basin Finance Journal, Elsevier, vol. 75(C).
    10. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    11. Jiang, Guohua & Lee, Charles M.C. & Yue, Heng, 2010. "Tunneling through intercorporate loans: The China experience," Journal of Financial Economics, Elsevier, vol. 98(1), pages 1-20, October.
    12. Katherine Guthrie & Jan Sokolowsky & Kam‐Ming Wan, 2012. "CEO Compensation and Board Structure Revisited," Journal of Finance, American Finance Association, vol. 67(3), pages 1149-1168, June.
    13. Ge, Wenxia & Ouyang, Caiyue & Shi, Zhenyang & Chen, Zhanliao, 2022. "Can a not-for-profit minority institutional shareholder make a big difference in corporate governance? A quasi-natural experiment," Journal of Corporate Finance, Elsevier, vol. 72(C).
    14. Wonjae Chang & Michael Dambra & Bryce Schonberger & Inho Suk, 2023. "Does Sensationalism Affect Executive Compensation? Evidence from Pay Ratio Disclosure Reform," Journal of Accounting Research, John Wiley & Sons, Ltd., vol. 61(1), pages 187-242, March.
    15. Francis, Bill & Hasan, Iftekhar & John, Kose & Sharma, Zenu, 2013. "Asymmetric benchmarking of pay in firms," Journal of Corporate Finance, Elsevier, vol. 23(C), pages 39-53.
    16. Holmstrom, Bengt & Milgrom, Paul, 1991. "Multitask Principal-Agent Analyses: Incentive Contracts, Asset Ownership, and Job Design," The Journal of Law, Economics, and Organization, Oxford University Press, vol. 7(0), pages 24-52, Special I.
    17. Cheng, Xu & Kong, Dongmin & Kong, Gaowen, 2022. "Foreign institutional investors and executive compensation incentives: Evidence from China," Journal of Multinational Financial Management, Elsevier, vol. 66(C).
    18. Lu, Jun & Shi, Zhen, 2018. "Does improved disclosure lead to higher executive compensation? Evidence from the conversion to IFRS and the dual-class share system in China," Journal of Corporate Finance, Elsevier, vol. 48(C), pages 244-260.
    19. Djankov, Simeon & La Porta, Rafael & Lopez-de-Silanes, Florencio & Shleifer, Andrei, 2008. "The law and economics of self-dealing," Journal of Financial Economics, Elsevier, vol. 88(3), pages 430-465, June.
    20. Zhang, Zixi & Cheng, Xiaoke & Cheng, Hanxiu & Sun, Qian, 2024. "Supervision of not-for-profit minority institutional shareholder and the cost of equity: Evidence from a quasi-natural experiment," Finance Research Letters, Elsevier, vol. 63(C).
    21. Ming Jian & T. J. Wong, 2010. "Propping through related party transactions," Review of Accounting Studies, Springer, vol. 15(1), pages 70-105, March.
    22. Zhang, Rongwu & Lin, Yanzhen & Zhang, Wenjia & Du, Jianjun, 2024. "Mixed ownership reform of state-owned enterprises and executive compensation stickiness: Evidence from China," International Review of Economics & Finance, Elsevier, vol. 95(C).
    23. Goodman-Bacon, Andrew, 2021. "Difference-in-differences with variation in treatment timing," Journal of Econometrics, Elsevier, vol. 225(2), pages 254-277.
    24. Lewellen, Wilbur G. & Park, Taewoo & Ro, Byung T., 1996. "Self-serving behavior in managers' discretionary information disclosure decisions," Journal of Accounting and Economics, Elsevier, vol. 21(2), pages 227-251, April.
    25. Zhao, Qicheng & Hu, Changyu & Ma, Ruiyun & Yin, Yugang & Liu, Yahui, 2024. "Foreign shareholders and executive compensation stickiness: Evidence from China," Finance Research Letters, Elsevier, vol. 59(C).
    26. Focke, Florens & Maug, Ernst & Niessen-Ruenzi, Alexandra, 2017. "The impact of firm prestige on executive compensation," Journal of Financial Economics, Elsevier, vol. 123(2), pages 313-336.
    27. Doruk Cengiz & Arindrajit Dube & Attila Lindner & Ben Zipperer, 2019. "The Effect of Minimum Wages on Low-Wage Jobs," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 134(3), pages 1405-1454.
    28. Wang, Kun & Xiao, Xing, 2011. "Controlling shareholders' tunneling and executive compensation: Evidence from China," Journal of Accounting and Public Policy, Elsevier, vol. 30(1), pages 89-100, January.
    29. Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
    30. Liao, Tianlong & Lin, Bingxuan & Liu, Jianhua & Lu, Rui, 2024. "Environmental risk exposure and executive pay-for-performance sensitivity," Pacific-Basin Finance Journal, Elsevier, vol. 83(C).
    31. Hu, Yi & Jin, Shuchang & Gu, Qiankun & Tang, Ziling, 2022. "Can a not-for-profit minority institutional shareholder impede stock price crash risk: Evidence from China," Finance Research Letters, Elsevier, vol. 47(PA).
    32. Lucian Arye Bebchuk & Jesse M. Fried, 2003. "Executive Compensation as an Agency Problem," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 71-92, Summer.
    33. Chen, Shen & Chen, Yuran & Zhang, Di & Wang, Jinmei, 2023. "Can minority investor activism promote corporate risk-taking? Evidence from a quasi-natural experiment in China," International Review of Financial Analysis, Elsevier, vol. 85(C).
    34. Kee‐Hong Bae & Jun‐Koo Kang & Jin‐Mo Kim, 2002. "Tunneling or Value Added? Evidence from Mergers by Korean Business Groups," Journal of Finance, American Finance Association, vol. 57(6), pages 2695-2740, December.
    35. Huang, Fumian & Ge, Liming & Wu, Sirui, 2023. "Minority shareholder protection, corporate governance, and investment efficiency," Finance Research Letters, Elsevier, vol. 58(PC).
    36. Marianne Bertrand & Sendhil Mullainathan, 2001. "Are CEOs Rewarded for Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 116(3), pages 901-932.
    37. Banker, Rajiv D. & Byzalov, Dmitri & Chen, Lei (Tony), 2013. "Employment protection legislation, adjustment costs and cross-country differences in cost behavior," Journal of Accounting and Economics, Elsevier, vol. 55(1), pages 111-127.
    38. Bakke, Tor-Erik & Mahmudi, Hamed, 2021. "Does Independent Advice to the Board Affect CEO Compensation?," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 56(2), pages 693-744, March.
    39. Qiang Li & Wenjuan Ruan & Ruotong Li & Hanqiao Li, 2023. "Do institutional investors’ holdings affect corporate environmental information disclosure? Evidence from China," Environment, Development and Sustainability: A Multidisciplinary Approach to the Theory and Practice of Sustainable Development, Springer, vol. 25(12), pages 14733-14751, December.
    40. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    41. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-264, April.
    42. John Gardner, 2022. "Two-stage differences in differences," Papers 2207.05943, arXiv.org.
    43. Jia, Qiaoyu & Zhou, Jia'nan, 2024. "Does economic policy uncertainty influence executive compensation stickiness? Firm-level evidence from China," Economic Analysis and Policy, Elsevier, vol. 83(C), pages 562-582.
    44. Paul C. Tetlock, 2010. "Does Public Financial News Resolve Asymmetric Information?," The Review of Financial Studies, Society for Financial Studies, vol. 23(9), pages 3520-3557.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Luo, Zijun & Li, Mingyang & Hu, Xueqin & Xu, Hao, 2025. "Beyond awareness: How investor-initiated communications reduce corporate carbon emissions," Economic Modelling, Elsevier, vol. 152(C).

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Wang, Qiong & Qiu, Muqing, 2023. "Strength in numbers: Minority shareholders' participation and executives' pay-performance sensitivity," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    2. Christian Engelen, 2015. "The effects of managerial discretion on moral hazard related behaviour: German evidence on agency costs," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 19(4), pages 927-960, November.
    3. Ann-Christine Schulz & Miriam Flickinger, 2020. "Does CEO (over)compensation influence corporate reputation?," Review of Managerial Science, Springer, vol. 14(4), pages 903-927, August.
    4. Andrea Melis & Silvia Carta & Silvia Gaia, 2012. "Executive remuneration in blockholder-dominated firms. How do Italian firms use stock options?," Journal of Management & Governance, Springer;Accademia Italiana di Economia Aziendale (AIDEA), vol. 16(3), pages 511-541, August.
    5. Amzaleg, Yaron & Azar, Ofer H. & Ben-Zion, Uri & Rosenfeld, Ahron, 2014. "CEO control, corporate performance and pay-performance sensitivity," Journal of Economic Behavior & Organization, Elsevier, vol. 106(C), pages 166-174.
    6. Xi, Dan & Wu, Yuze & Wang, Xue & Fu, Zhe, 2023. "Corporate social responsibility and excess perks," Journal of Empirical Finance, Elsevier, vol. 74(C).
    7. Mou, Shaobo & Yi, Sijia & Zhang, Qiufeng & Liu, Danping, 2025. "Common institutional ownership and executive pay-performance sensitivity: Mediating role of information transparency and fund occupation," Research in International Business and Finance, Elsevier, vol. 74(C).
    8. A. Hossain & A.-A. Masum & S. Saadi & R. Benkraiem & N. Das, 2023. "Firm-Level Climate Change Risk and CEO Equity Incentives," Post-Print hal-04434397, HAL.
    9. Jiang, Lin & Kling, Gerhard & Bo, Hong & Driver, Ciaran, 2017. "Why do firms adopt stock options and who benefits? A natural experiment in China," Pacific-Basin Finance Journal, Elsevier, vol. 46(PA), pages 124-140.
    10. Liang, Hao & Renneboog, Luc & Sun, Sunny Li, 2015. "The political determinants of executive compensation: Evidence from an emerging economy," Emerging Markets Review, Elsevier, vol. 25(C), pages 69-91.
    11. Anne Amar-Sabbah & Pierre Batteau, 2018. "CEO Compensation: Agency Theory is Irrelevant but not the Neoclassical Game-Theoretic Framework," Working Papers halshs-01818600, HAL.
    12. Reza, Syed Walid, 2020. "Profit skimming, asymmetric benchmarking, or the effects of implicit incentives? Evidence from natural disasters," Journal of Multinational Financial Management, Elsevier, vol. 57.
    13. Lucian A. Bebchuk & Michael S. Weisbach, 2012. "The State of Corporate Governance Research," Springer Books, in: Sabri Boubaker & Bang Dang Nguyen & Duc Khuong Nguyen (ed.), Corporate Governance, edition 127, pages 325-346, Springer.
    14. Clement Olalekan Olaniyi & Olaolu Richard Olayeni, 2020. "A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms," Journal of Social and Economic Development, Springer;Institute for Social and Economic Change, vol. 22(2), pages 250-277, December.
    15. Cheng, Minying & Lin, Bingxuan & Wei, Minghai, 2015. "Executive compensation in family firms: The effect of multiple family members," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 238-257.
    16. Liew, Chee Yoong & Ko, Young Kyung & Song, Bee Lian & Murthy, Saraniah Thechina, 2019. "Directors’ remuneration, expropriation and firm performance in Malaysia: evidence from non-executive directors’ service duration within the remuneration committee," MPRA Paper 99703, University Library of Munich, Germany.
    17. Liu, Simeng & Wang, Kun Tracy & Walpola, Sonali & Zhu, Nathan Zhenghang, 2024. "CSR contracting and stock price crash risk: International evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 93(C).
    18. Yaowen Shan & Terry Walter, 2016. "Towards a Set of Design Principles for Executive Compensation Contracts," Abacus, Accounting Foundation, University of Sydney, vol. 52(4), pages 619-684, December.
    19. Naeem Tabassum & Satwinder Singh, 2020. "Corporate Governance and Organisational Performance," Springer Books, Springer, number 978-3-030-48527-6, January.
    20. Machado, Vagner Naysinger & Sonza, Igor Bernardi & Nakamura, Wilson Toshiro & Mendes, Johnny Silva & dos Santos, Marco Aurélio, 2024. "Executive compensation disclosure in emerging markets with weak shareholder enforcement: A multi-level analysis," Global Finance Journal, Elsevier, vol. 63(C).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:ecmode:v:151:y:2025:i:c:s0264999325002081. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/inca/30411 .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.