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Career concerns and 'unpaid' executives


Chen, Hui; Luo, Wei; Soderstrom, Naomi (2016). Career concerns and 'unpaid' executives. SSRN Electronic Journal, (2822622):1-57.

Abstract

A significant portion of CEOs in publicly-listed Chinese state-owned enterprises
receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive mechanism differ from the conventional approach. Consistent with career concerns as their main incentive mechanism, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we look at subsamples in which individual CEOs switch payment regimes. We also find that compared to their peers with paid CEOs, firms with unpaid CEOs in general have higher return on assets, higher asset turnover, higher asset growth, and engage in less tunneling.
To mitigate concerns of that our results are driven by CEO selection and to further investigate the use of implicit incentives, we conduct an event study using the Split Share Structure Reform in 2006. The Reform liberalized the Chinese stock market, thus strengthening the role of the market as an incentive mechanism. This mechanism provides a potential replacement for promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.

Abstract

A significant portion of CEOs in publicly-listed Chinese state-owned enterprises
receive zero pay from the companies for which they work. Instead, they are paid directly by their controlling shareholder, which can be the Chinese government or parent firms that are controlled by the Chinese government. We explore how these “unpaid” executives are motivated and whether the outcomes of this unusual incentive mechanism differ from the conventional approach. Consistent with career concerns as their main incentive mechanism, we find that these CEOs have a significantly higher probability of future promotion than other CEOs. This result holds when we look at subsamples in which individual CEOs switch payment regimes. We also find that compared to their peers with paid CEOs, firms with unpaid CEOs in general have higher return on assets, higher asset turnover, higher asset growth, and engage in less tunneling.
To mitigate concerns of that our results are driven by CEO selection and to further investigate the use of implicit incentives, we conduct an event study using the Split Share Structure Reform in 2006. The Reform liberalized the Chinese stock market, thus strengthening the role of the market as an incentive mechanism. This mechanism provides a potential replacement for promotion incentives. Our evidence is generally consistent with a reduction in the strength of promotion incentives following the reform.

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Additional indexing

Item Type:Journal Article, refereed, original work
Communities & Collections:03 Faculty of Economics > Department of Business Administration
Dewey Decimal Classification:330 Economics
Language:English
Date:15 August 2016
Deposited On:22 Aug 2019 14:42
Last Modified:25 Sep 2019 00:42
Publisher:SSRN
ISSN:1556-5068
OA Status:Green
Free access at:Publisher DOI. An embargo period may apply.
Publisher DOI:https://doi.org/10.2139/ssrn.2822622
Other Identification Number:merlin-id:18034

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