Executive Compensation and Legal Investor Protection: Evidence from China's Listed Firms |
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| Authors: | Zhigang Zheng Li‐An Zhou Yanmei Sun Chao Chen |
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| Institution: | 1. School of Finance, Renmin University, Beijing, China;2. Guanghua School of Management, Peking University, Beijing, China;3. School of Banking and Finance, University of International Business and Economics, Beijing, China;4. School of Management, Fudan University, Shanghai, China |
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| Abstract: | This paper seeks to relate the increases in executive compensation observed in China to improvement of the legal environment. We build a simple model and demonstrate that improvement in legal investor protection reduces the manager's private benefits of control; in order to make the managerial incentives compatible, some of the forgone private benefits have to be compensated in the form of increased executive pay. Using a large dataset on Chinese listed corporations, we find strong evidence that improvement of the legal environment is significantly associated with both the rise in executive compensation and the reduction in agency costs, which is consistent with our model predictions. |
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