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Stock market liberalization and pay for market-based performance: Evidence from a quasi-natural experiment in China

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  • Chen, Yuyang
  • Wang, Xinlu
  • Chen, Kun

Abstract

Our study examines how the liberalization of stock markets affects the contractual usefulness of market information in executive compensation, as reflected in the pay-performance sensitivity. Using a quasi-natural experiment in China, we find that stock market liberalization policy increases the pay-for-market-performance relationship but has no significant impact on pay-for-accounting-performance relationship. Further analyses indicate that the influence of market liberalization on the CEO pay-for-market-performance relationship is restricted to firms with effective governance, a strong legal enforcement environment, operating in unregulated industries, and firms without major shareholders from state agencies. Finally, we find that such effects may be a result of higher price informativeness, shorter price delays and lower price mispricing following stock market liberalization.

Suggested Citation

  • Chen, Yuyang & Wang, Xinlu & Chen, Kun, 2023. "Stock market liberalization and pay for market-based performance: Evidence from a quasi-natural experiment in China," Pacific-Basin Finance Journal, Elsevier, vol. 79(C).
    • Handle: RePEc:eee:pacfin:v:79:y:2023:i:c:s0927538x23000963
    DOI: 10.1016/j.pacfin.2023.102030
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    More about this item

    Keywords

    Stock market liberalization; Stock price informativeness; CEO compensation; Pay-performance relationship;
    All these keywords.

    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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