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

  • Kato, Takao
  • Long, Cheryl

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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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
Contact details of provider: Web page: http://www.journals.uchicago.edu/EDCC/

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