Controlling shareholders’ incentives and executive pay-for-performance sensitivity: Evidence from the split share structure reform in China

• DOI: 10.1016/j.intfin.2014.10.003
• Publication Date: 2014-10-31T16:20:27Z
• Authors: Shenglan Chen; Bingxuan Lin; Rui Lu; Ting Zhang
• Keywords: Controlling shareholders; Economic History; Corporate governance; 330; Economics; Finance and Financial Management; 05 social sciences; China market; Pay for performance; and Operations; 650; Management; 8. Economic growth; 0502 economics and business; International Economics; Economic Theory; Finance; Business Administration

Abstract Using the split share structure reform in China as a natural experiment, we study how changes in controlling shareholder incentive affect the pay-for-performance sensitivity. The reform converts the shares owned by controlling shareholders from non-tradable to tradable shares. The removal of such market friction allows for a better alignment of interests between controlling and minority shareholders, which gives managers more incentives to improve corporate performance. We find that the pay-for-performance sensitivity improves greatly after the reform. Changes in the pay-for-performance sensitivity are also associated with firm ownership structure, the level of agency conflicts and governance quality. Given that firms with controlling shareholders are the dominant form of business organization in many countries around the world, our results have important implications in that they show that a better alignment between controlling and minority shareholders’ incentives has a significant effect on executive compensation.