Agency Theory and Executive Compensation: The truth of China State-Owned Businesses Essay

Agency Theory and Professional Compensation:

The situation of Oriental State-Owned Companies

Taye Mengistae

Development Exploration Group

The earth Bank

Lixin Colin Xu*

Development Exploration Group

The World Bank

Matching Author:

Lixin Colin Xu

MC 3-300

DECRG, The World Bank

1818 H Street, N. T.

Washington, POWER 20433

Mobile phone: (202) 473-4664

Fax: (202) 522-1155

Email: [email protected] ORG

*

All of us thank Chong-En Bai intended for useful talks, and Canice Prendergast (the editor) and two confidential referees intended for constructive feedback. Colin Xu also appreciates the effect of Sherwin Rosen in spurring his interest in professional compensation. The information set was kindly given by the China Academy of Social Research (CASS) the result of a survey carried out by the Institute of Economics of the CASS in effort with economic analysts from the University of The state of michigan, University of California, Hillcrest and Oxford University. Economic support through the Ford Base to organizing the data set is gratefully acknowledged.

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Agency Theory and Exec Compensation:

The Case of Chinese language State-owned Corporations

Abstract. This paper looks at the degree to which organization theory may well explain CEO compensation in state-owned corporations (SOEs) in China through the 1980s. We discover that the awareness of CEO pay to firm overall performance decreases while using variance of performance. This can be consistent with the conjecture of a tradeoff between offers and insurance in agency theory. On the other hand, the data loan little support to the family member performance analysis hypothesis. All of us also find that the overall performance sensitivity of CEO shell out increases while using marginal come back to executive actions, that is, shell out sensitivity improves with managerial control legal rights, worker incentives, profit retention rates of firms, as well as the degree of merchandise market competition faced by firm. Even though the elasticity of pay to sales is usually slightly smaller than that present in the materials on regular firms in the West generally, our estimate in the semi-elasticity of pay regarding profitability resembles estimates intended for regulated companies in the United States.

JEL codes: D2, G3, J3, L2, L3, P5.

Key words: CEO settlement, agency theory, relative overall performance model, SOEs, China.

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I.

Introduction

The large and growing body system of scientific work on the economics of managerial

payment is mostly depending on the concept of the aligning the eye of corporate and business executives with this of investors. However , among the list of papers that formally test out predictions of standard models of agency, simply half a dozen possibly even are concerned with insurance-incentives tradeoffs in settlement schemes. one particular These include, for example , Aggarwal and Samwick (1999), which

evaluates a large data set by 1500 U. S.

businesses and find strong evidence of pay out schemes trading off the dotacion of incentives against the allowance of performance risk: besides executive pay out increase in company performance, nevertheless pay-performance tenderness also reduces in the difference of overall performance. This proof is supported by results of Garen (1994) and Lambert and Lacker (1987), but happens to be contradicted by, for instance , Core and Guay (1998), Bushman et al. (1996), and Yermack (1995), which find very little evidence within their data favoring the incentive-insurance tradeoff speculation. A part of the literature is usually concerned with another aspect of company theory, specifically, the relative performance evaluation hypothesis. Here too the evidence is rather mixed: while most studies do not support the hypothesis, there are noteworthy exceptions. 2

1

Find Rosen (1992), Murphy (1999), Lazear (1999), Abowd and Kaplan (1999) and Prendergast (1999) pertaining to surveys in this topic. Inside our view the key achievement from the literature to date is the opinion that executive earnings boost with corporate performance (e. g., Jensen and Murphy, 1990; Garen, 1994; Kaplan, 1994; Baker and Area, 1998;...



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