managerial pay disparity and firm...

1

Managerial pay disparity and firm outcomes

Research proposal for fulfilment of the requirements for Doctor

of Philosophy in Finance

School of Economics and Finance

Massey University

Xutang Liu

July 2020

Supervisors

Prof. Martin Young

Dr. Jing Liao

2

Table of Contents

Managerial pay disparity and firm outcomes................................................................. 1

1. Introduction ................................................................................................................ 5

1.1 CEO pay disparity: A brief overview ................................................................... 6

1.2. Why Chinese studies? ......................................................................................... 8

1.3 Overview of the three essays ................................................................................ 9

1.3.1 Essay one: CEO pay disparity and firm performance: New evidence from

China ..................................................................................................................... 10

1.3.2 Essay two: Managerial pay disparity and earnings management: Evidence

from China ............................................................................................................ 12

1.3.3 Essay three: Managerial pay disparity and firm decision-making and output:

Asia-Pacific study ................................................................................................. 13

1.4 Structure of the research proposal ...................................................................... 14

2. Literature review ...................................................................................................... 14

2.1 Rank-order tournament theory ........................................................................... 14

2.2 Managerial power theory ................................................................................... 15

2.3 CEO pay disparity .............................................................................................. 16

2.3.1 Measurement one: CEO pay gap ................................................................. 17

2.3.2 Measurement two: CEO Pay Slice (CPS).................................................... 18

2.4 CEO pay disparity and firm performance .......................................................... 19

2.4.1 CEO pay gap and firm performance ............................................................ 19

2.4.2 CEO pay slice (CPS) and firm performance ............................................... 21

2.5 CEO pay disparity and earnings management ................................................... 23

2.6 CEO pay disparity and firm behaviours and output ........................................... 25

3. Essay one ................................................................................................................. 28

3.1 Introduction ........................................................................................................ 28

3.2 Literature review and hypothesis development .................................................. 31

3.2.1 CEO pay disparity ....................................................................................... 31

3.2.2 Rank-order tournament theory ..................................................................... 31

3.2.3 Managerial power theory ............................................................................. 32

3.3 Sample and variable construction ...................................................................... 33

3.3.1 Data .............................................................................................................. 33

3

3.3.2 Variable construction ................................................................................... 34

3.3.3 Descriptive Statistics and correlation matrix ............................................... 35

3.3.4 Empirical analysis........................................................................................ 37

3.3.5 CEO pay disparity and firm performance, sub-sample analysis ................. 40

3.4 Conclusion .......................................................................................................... 44

3.5 Appendix ............................................................................................................ 46

Appendix A: Variable definitions ......................................................................... 46

3.6 Tables ................................................................................................................. 47

Table 1: Summary statistics .................................................................................. 47

Table 2: Time trend .............................................................................................. 48

Table 3: Correlation matrix .................................................................................. 50

Table 4: CEO pay disparity and firm performance. ............................................. 51

Table 5: Determinants of CEO pay disparity. ...................................................... 52

Table 6: CEO pay disparity and firm performance, PSM approach analysis. ...... 53

Table 7: CEO pay disparity and firm performance: SOEs and private firms ....... 55

Table 8: CEO pay disparity and firm performance: Pre and Post “pay ceiling”

regulation period ................................................................................................... 57

Table 9: CEO pay disparity and firm performance: does industry concentration

matter .................................................................................................................... 60

Table 10: CEO pay disparity and firm performance: does non-CEO executives’

age matter ............................................................................................................. 62


gender matter ........................................................................................................ 63

4. Essay two ................................................................................................................. 64

4.1 Introduction ........................................................................................................ 64


4.3 Sample and variable construction ...................................................................... 68

4.3.1 Data .............................................................................................................. 68

4.3.2 Variable construction ................................................................................... 68

4.3.3 Descriptive Statistics and correlation matrix ............................................... 70

4.3.4 Empirical analysis........................................................................................ 71

4.4 Future analysis.................................................................................................... 72

4.5 Appendix ............................................................................................................ 73

4

Appendix A: Variable definitions ......................................................................... 73

4.6 Tables ................................................................................................................. 74

Table 1: Summary statistics .................................................................................. 74

Table 2: Time trend .............................................................................................. 75

Table 3: Correlation matrix .................................................................................. 76

Table 4: Managerial pay disparity and accrual-based earnings management. ..... 77

5. Essay three ............................................................................................................... 80

5.1 Introduction ........................................................................................................ 80


6. Proposed timeline for the completion of Dissertation ............................................. 84

7. References ................................................................................................................ 85

5

1. Introduction

The goal of this thesis is to investigate whether and how managerial pay disparity

affects firm outcomes. Managerial pay disparity has become one of the corporate

governance topics that attract wide attention in recent years. The three essays in this

thesis will have a focus on managerial pay disparity to examine whether it can be served

as an effective corporate governance mechanism for improved firm outcomes. Besides,

the executive gender, age, tenure, and other corporate governance factors are addressed

in this thesis. My study will be useful for policy-makers to ensure that appropriate

regulations are put in place to improve corporate governance.

The top management team is responsible for a firm’s day-to-day operations and

profitability. Besides, the nature of executive work requires a high degree of task

interdependence (Siegel & Hambrick, 2005). As the key to the corporate remuneration

structure, managerial pay disparity plays an important role in the inner workings of the

top management team (Bebchuk, Cremers, & Peyer, 2011). Thus, a proper managerial

pay disparity is essential to incentivise senior executives to make best efforts and

improve firm outcomes.

The first two essays investigate the effect of managerial pay disparity on firm

performance and earnings management, respectively. The main focus is chief executive

officer (CEO) pay disparity defined as the compensation differential between the CEO

and other top executives. According to the rank-order tournament theory, a larger CEO

pay disparity is beneficial to firm outcomes because it provides non-CEO executives

with tournament incentives to make them work harder and to invest in firm specific

human capital (Lazear & Rosen, 1981). Therefore, a large pay disparity helps build a

large pool of skilled internal candidates to compete for the CEO position (Chen, Huang,

& Wei, 2013). However, the managerial power theory argues that a large CEO pay

disparity harms firm performance since it reflects the relative power and dominance of

the CEO within the top management team and relative to the board of directors

(Bebchuk et al., 2011; Chen et al., 2013). That is, a large CEO pay disparity indicates

6

an entrenched CEO (Chen et al., 2013). It is important to investigate whether and how

CEO pay disparity can serve as a governance mechanism to improve corporate

governance structure and firm outcomes. According to the upper echelons theory

(Hambrick & Mason, 1984), the objective and psychological characteristics of top

management team drive their strategic choices and impact firm decision-making; thus,

top executives’ personal characteristics such as age, gender, education, tenure, and

politically connection will be investigated as well in this thesis.

China, as the biggest emerging market, provides a unique setting to investigate the

influence of CEO pay disparity on firm outcomes. It is argued that China’s corporate

governance system is poor, and the outside investor protection is insufficient (Firth,

Fung, & Rui, 2006; Hu, Pan, & Tian, 2013). Stakeholders of public listed firms could

prefer to believe the internal monitoring mechanisms such as setting managerial

compensation, rather than the external mechanisms (Firth et al., 2006; Murphy, 1999).

Thus, it is of great importance to investigate whether managerial pay disparity plays a

role. By conducting the studies using China data (essay one and two), the thesis makes

a further contribution to the relevant literature by providing evidence from the largest

emerging economy. The proposed research (essay three) studies the efficiency of

managerial pay disparity in Asian markets, e.g. China, Japan, South Korea, and

Singapore, therefore addressing how culture and legal systems affect the roles of CEO

pay disparity which is still a research challenge in the relevant literature.

1.1 CEO pay disparity: A brief overview

Compensation policy is one of the most important factors that affect organisational

success (Jensen & Murphy, 1990). The compensation structure of a top management

team has received considerable attention from academics and practitioners alike.

Particularly, managerial pay disparity is an essential aspect of the corporate

remuneration structure. CEO pay disparity, defined as the pay differential between CEO

and other top executives, plays an important role in the inner workings of the top

7

management team and influences firm performance and behaviours significantly

(Bebchuk et al., 2011; Kale, Reis, & Venkateswaran, 2009; Kini & Williams, 2012).

There are two competing theories on the role of CEO pay disparity, e.g., the rank-order

tournament theory and managerial power theory. According to the tournament theory,

a large CEO pay gap provides strong tournament incentives for non-CEO executives to

make great efforts to increase the likelihood of promotion to the next CEO (Lazear &

Rosen, 1981). Since the rank-order tournaments are schemes of relative performance

evaluation and the managerial skills are hard to measure, a large pay gap provides non-

CEO executives with effective promotion-based tournament incentives for improved

enterprise performance. For example, Kale et al. (2009) document that the pay gap

between the CEO and other top executives is positively associated with firm value and

performance. With a larger pay gap, non-CEO executives have an increased motivation

to perform for the advancement chances of becoming the next CEO (Goel & Thakor,

2008; Ramakrishan & Thakor, 1991). It is consistent with the finding of Lee, Lev, &

Yeo (2008) that a larger executive pay dispersion leads to higher firm performance.

Besides, a large CEO pay dispersion provides a large tournament prize for non-CEO

executives that promotes aggressive and competitive behaviours (Siegel & Hambrick,

2005), such as taking riskier projects (Kini & Williams, 2012) or engaging in more

earnings manipulation (Park, 2017). Therefore, the tournament theory suggests a

positive association between CEO pay disparity and corporate aggressive behaviours.

Managerial power is defined as the ability of an individual manager to exert his or her

will to corporate decision-making (Finkelstein, 1992; Hickson, Hinings, Lee, Schneck,

& Pennings, 1971; Pfeffer, 1981). According to the managerial power theory, a larger

pay disparity between the CEO and other top executives reflects the CEOs' relative

power and dominance in influencing the remuneration decisions made by the

compensation committee of the board (Bebchuk & Fried, 2003; Bebchuk, Fried, &

Walker, 2002). The larger the compensation gap, the higher the motivation of CEOs to

protect both their financial wealth and career security. Hence, powerful CEOs are more

likely to design pay packages to pursue self-interests rather than shareholders’ interests.

8

This, in turn, leads to more agency problems that reduce corporate performance and

value (Adams, Almeida, & Ferreira, 2005; Bebchuk et al., 2011; Bebchuk & Fried,

2003). For instance, Bebchuk et al. (2011) find that a large CEO pay disparity is

associated with lower firm value and accounting performance.

With a larger pay dispersion, CEOs are more incentivised to demand and protect their

high compensation through relatively strong power and influence within the top

management team and relative to the board of directors. Thus, a large pay dispersion

suggests that the powerful CEO is entrenched so that more agency issues may happen

during his/her tenure. As a result, the managerial power theory proposes a negative

relationship between CEO pay disparity and firm performance.

1.2. Why Chinese studies?

Existing studies have examined the pay disparity and its relationship with corporate

performance and value, but controversy remains in this line of research. Most of the

existing studies in this area are conducted utilising data from Western industrialised

societies, and it may not be appropriate to draw general conclusions about the role of

executive pay disparity basing on existing studies.

China provides an interesting setting to examine such a research topic due to its unique

institutional mechanisms. Since the disclose of individual compensation for senior

executives (including CEO, CFO, Chairman, and other executives) in 2005, reports and

supervision by the news media have made the issue of compensation a focus of attention

from all walks of life in China. The corporate governance system is relatively poor and

the protection for investors and transactions is weak in the Chinese market (Allen, Qian,

& Qian, 2005; Feng, Ge, Luo, & Shevlin, 2011). It is very common for top management

teams to obtain extremely high and unreasonable pay packages in listed firms. Under

this circumstance, increased salary payments and widened compensation gaps have

attracted substantial public attention and caused significant controversy in society. The

Chinese central government has introduced a series of regulations to regulate the

9

compensation of top executives to mitigate the strong social complaints about pay

inequality.

In particular, the Chinese government put forward the “pay ceiling” regulation for top

executives in central state-owned enterprises (SOEs) in 20141 and it was officially

implemented from January 1, 2015. The regulation served primarily to set a cap on the

ratio of total executive pay to the average salary of employees to limit excessive

executive compensation. Specifically, the compensation structure includes basic annual

salary, performance-based annual salary, and term incentive bonus. All these three

components of executive pay are restricted by this regulation respectively. The basic

annual salary is at the maximum twice as much as the average annual wage of non-

executive employees in the central SOEs, calculated basing on the previous year’s

payments. The annual salary for performance shall not exceed twice as the basic annual

salary. The term incentive bonus within an executive’s tenure should not exceed 30%

of the total annual salary. After putting in place a ceiling, the executive-worker pay

ratio is expected to trim down to about eight. The local SOEs are required by the central

government to follow this executive pay ceiling regulation.

1.3 Overview of the three essays

My first two essays focus on the effects of managerial pay disparity on firm

performance and earnings management in China, respectively. Prior studies on top

management pay disparity primarily focus on the United States market. The Chinese

government announced the “Reform Scheme on Executive Compensation of the

Central State-Owned Enterprises” in 2015, which provides a unique natural shock to

explore whether the narrowed inequality between the CEO and other top executive pay

will have a significant impact on firm performance and earnings management. The

robustness checks such as subsample analysis will further be done to explore the

efficiency of CEO pay disparity in depth. The third essay will conduct a cross-country

study to examine whether the effect of managerial pay disparity on firm decision-

1 http://www.china.org.cn/china/2014-08/28/content_33374610.htm

10

making and output varies across Asian countries such as China, Japan, South Korea,

and Singapore.

1.3.1 Essay one: CEO pay disparity and firm performance: New evidence from

China

My first essay is on the impact of CEO pay disparity on firm performance in China.

The main focus is CEO pay disparity that indicates the pay differential between the

CEO and other top executives. Kale et al. (2009) highlight that a large CEO pay gap

provides non-CEO executives with tournament incentives to work harder and improve

firm performance. Under this argument, firms with a large CEO pay disparity would be

related to better performance. Bebchuk et al. (2011) document that a large CEO pay

disparity reflects a powerful and entrenched CEO that leads to worse firm performance.

Due to the inconclusive evidence, the first essay investigates the impact of CEO pay

disparity on firm performance in China’s listed firms. Particularly, the executive pay

ceiling regulation will be employed as the exogenous shock to examine the relationship.

The literature on the CEO pay disparity in China is very sparse and very few researches

focuses on the salary reform in 2015. My research examines the effect of CEO pay

disparity on firm performance in China before and after the 2015 regulatory change.

Moreover, subsample analysis is conducted to investigate whether the positive relation

between CEO pay disparity and firm performance is robust.

CEO pay disparity is addressed through two approaches. Following Kale et al. (2009),

the CEO pay gap (CPG) between the CEO and other top executives is used as the first

measure. CEO pay slice (CPS) measured as the ratio of CEO pay to the total

compensation of the top five executives is utilised as the second approach following

(Bebchuk et al., 2011). Using a sample of executives’ cash compensation data from the

CSMAR database for the period 2005 to 2017, I first find that CPG is associated with

better corporate performance measured as return on assets (ROA) and return on equity

(ROE). This finding is in line with the rank-order tournament theory. Moreover, CPS

also has a positive relationship with firm performance. This result does not support the

11

managerial power theory but the tournament theory. The significantly and positively

relationship remains robust after addressing the endogeneity concerns by employing

the propensity score matching method. Hence, a large CEO pay disparity as a corporate

governance mechanism plays a positive role in firm performance in China’s listed firms.

In addition, the subsample analysis is conducted to examine whether the positive

influence of CEO pay disparity on firm performance is robust. CPG is used to present

the CEO pay disparity in sub-samples since the CPG is a better measurement than CPS

to capture the tournament effects based on previous literature. I first split the full sample

into subsamples of state-owned enterprises (SOEs) and private firms basing the

ultimate controller of sample firms. It is found that the positive tournament effects apply

to both SOEs and private firms. Besides, the 2015 pay ceiling regulation could drive

the relationship between CEO pay disparity and firm performance in SOEs. By dividing

the SOEs sample into pre-regulation (before 2015) and post-regulation (after 2015)

subsamples, I find that the CPG is positively associated with firm performance (ROA)

in both the pre and post regulation periods. It indicates that the tournament effects

remain robust when addressing the influence of the regulation. However, the effect of

CPG is not significant in the post-regulation period in SOEs directly controlled by

government bureaus who could be more sensitive to the pay ceiling regulation.

Therefore, the “pay ceiling” regulation decreases the CEO pay disparity that in turn

reduces the tournament incentives of non-CEO executives in SOEs directly controlled

by government bureaus.

Further, I examine the sensitivity of non-CEO executives to tournament incentives. The

tournament effects in SOEs are subject to industry-concentration measured by

Herfindahl-Hirschman Index (HHI). In highly concentrated industries (high HHI), there

is no significant relation between CPG and ROA. Within the SOEs, the non-CEO

executives’ tournament incentives may not play a role in highly concentrated industries

since their current firms have the monopoly power and outside career markets are very

limited. I further find that the CPG does not play a role in firms where the non-CEO

executives are too young or too old because their work incentives are driven by their

12

age. For example, the ambition of older top executives to a higher position is limited,

and younger executives could be more active in job-hopping that can provide them with

higher salaries and better positions. Finally, I examine whether the executives’ gender

matters for the tournament effects. It is found that the positive influence of CPG on

ROA is insignificant if the female ratio within non-CEO executives is greater than 50%.

Female executives are more risk-averse than males (Byrnes, Miller, & Schafer, 1999;

Charness & Gneezy, 2012), thus, leading to reduced work incentives for promotion to

higher position.

Overall, the tournament theory is applied to China’s listed firms, and a large CEO pay

disparity as a useful governance mechanism is beneficial to firm performance. It is

obviously essential to address social fairness, but the policy-makers should consider

keeping enough tournament incentives for top executives to keep them work harder.

Simply limiting the compensation of top executives in SOEs may not necessarily

improve firm performance.

1.3.2 Essay two: Managerial pay disparity and earnings management: Evidence

from China

My second essay is on the impact of managerial pay disparity on earnings management

in China. The pay disparity between the CEO and other top executives is the focus of

this study. In particular, chief financial officers (CFOs) could play an important role in

earnings manipulation since they have the primary responsibility in overseeing the

firms’ overall financial reporting (Geiger & North, 2006). Hence, the pay gap between

the CEO and the CFO is an important focus as well. Earnings management includes

accrual-based earnings management and real earnings management, and both are

evidence of weak corporate governance. Given the fact that earnings management

activities are common in China (Firth et al., 2006; Liu & Lu, 2007), it is worthwhile to

examine whether and how managerial pay disparity influence earnings manipulation.

I first examine the relationship between the managerial pay disparity and accrual-based

earnings management. My preliminary results show that the pay gap between the CEO

13

and the CFO is negatively associated with accrual-based earnings management. This

finding indicates that the firm with a large pay gap between the CEO and the CFO is

less likely to manipulate reported earnings. It is argued that CFOs bear more legal costs

and higher loss of reputation and wealth than that of CEOs in manipulating earnings

(Feng et al., 2011; Mian, 2001). In firms with a large managerial pay gap, CFOs are

motivated by large tournament incentives to increase their chances of advancing to the

CEO position. Given the fact that CFOs would be exposed to potentially high loss in

both career and wealth from accounting manipulations, they could be more

conservative and cautious in manipulating reported earnings. Therefore, if CFOs aim

for an increased chance of promotion, they would be less likely to conduct accrual-

based earnings management.

I also find that the pay gap between the CEO and other top executives is not

significantly correlated with accrual-based earnings management. Jiang, Petroni, &

Wang (2010) document that CEOs or CFOs are more likely to have professional

financial and accounting knowledge compared to other top executives. Hence, non-

CEO executives could face higher costs of managing accruals than CFOs (Park, 2017).

Given the fact that most of the top managers carry out and oversee the firms’ daily

operational decisions, they could have a stronger influence on real earnings

management than accrual-based earnings management. I will examine the impact of

managerial pay disparity on real earnings management. Overall, the tournament

incentives make CFOs more conservative in engaging in accrual-based earnings

management. The large managerial pay disparity could be served as a useful

governance mechanism to improve corporate governance for Chinese listed firms.

1.3.3 Essay three: Managerial pay disparity and firm decision-making and output:

Asia-Pacific study

My third essay will investigate the efficiency of managerial pay disparity in Asian

markets, e.g. China, Japan, South Korea, and Singapore. Most of the existing studies

examine the influence of managerial pay disparity in Western industrialised societies,

14

especially the US market. Given the fact that the legal system and institution setting

vary across countries, the conclusion generated from prior literature may not apply to

other economies. For instance, China, Korea, and Japan belong to the Civil Law System,

while Singapore belongs to the Common Law System. Moreover, the literature

document that corporate governance and investor protection are weak in China and

Korea, whereas in Japan and Singapore they are good (ASFRC, 2017; Jiang et al., 2010).

Thus, it is expected that the role of managerial pay disparity is subject to the legal

system and institution setting. Al-Najjar, Ding, & Hussainey (2016) find that CPS

reflects managerial talents rather than managerial power in UK listed firms. CEOs with

outstanding abilities and skills can be rewarded relatively higher salaries within the top

management team. It is because the UK public listed firms developed strengthened

internal governance and established relative independent remuneration committees.

Therefore, a cross-economy study can address how culture and legal systems affect the

role of managerial pay disparity, which is still a research challenge in the relevant

literature.

1.4 Structure of the research proposal

The reminder of this research proposal is structured as follows. Section 2 is the literature

review of the managerial pay disparity and firm outcomes. Section 3, 4 and 5 present

the research details of essay one, essay two and essay three, respectively. Section 6

shows the proposed timeline for the Ph.D. completion. Section 7 presents the references.

2. Literature review

2.1 Rank-order tournament theory

Rank-order tournament theory, first proposed by Lazear & Rosen (1981), indicates that

large pay gaps provide strong tournament incentives for workers to make greater effort

to garner higher positions. The level of employee compensation stepped increase with

the promotion of positions because the wage differences are based not on marginal

productivity but instead based on relative differences between the individuals. Thus,

15

employees can be rewarded by their rank in an organization, suggesting that the higher

the rank, the larger the salaries. However, the tournament prize is not always the same,

since it varies from the level of the pay gap and the number of tournament participants.

The large pay disparity and the number of top executives both lead to increased

tournament prize (Eriksson, 1999; Lin, Shen, & Su, 2009; Lin, Yeh, & Shih, 2013).

According to that, a larger CEO pay gap will provide the non-CEO executives with

more incentives to work harder to increase their chances of becoming the next CEO

(Goel & Thakor, 2008; Haß, Müller, & Vergauwe, 2015; Kini & Williams, 2012;

Ramakrishan & Thakor, 1991). Since the rank-order tournaments are schemes of

relative performance evaluation and the managerial skills are hard to quantify,

executives’ compensation depends on their performance ranking rather than objective

performance itself. Thus, top executives will only be able to become the best relative

performer and receive the tournament prize by working harder to increase their

perceived outputs, and ultimately improve firm performance. This viewpoint supports

that a large CEO pay gap provides goals for top executives and incentivises to work

hard, which is beneficial to corporate performance (Eriksson, 1999; Hu et al., 2013;

Kale et al., 2009; Main, O'Reilly III, & Wade, 1993).

Overall, tournament theory states that a larger pay gap is effective as it provides

appropriate incentives for non-CEO executives to exert effort so that they may one day

be promoted to CEO of a company. Based upon the rank-order tournament theory, it is

expected that the CEO pay gap has a positive influence on corporate performance and

behaviours.

2.2 Managerial power theory


will to corporate decision-making (Finkelstein, 1992; Hickson et al., 1971; Pfeffer,

1981). A powerful CEO can influence firm decision-making, such as exert his or her

desires on the remuneration decisions made by the compensation committee of the

board (Bebchuk et al., 2011; Finkelstein, 1992; Lambert, Larcker, & Weigelt, 1993).

16

Thus, CEOs can design their own pay packages to pursue high salary for private

benefits rather than shareholders’ interests. According to the managerial power

perspective, large CEO pay and pay disparity reflect the relatively high bargaining

power of a CEO within the top management team and relative to board of directors

(Bebchuk & Fried, 2003; Chen et al., 2013; Dai, Kong, & Xu, 2017). Therefore, a large

pay dispersion between the CEO and other top executives indicates the substantial

impact of a powerful CEO on the compensation scheme. The powerful CEOs might be

entrenched, which lead to more agency problems and corporate value might decline

during their tenure (Adams et al., 2005; Bebchuk et al., 2011; Bebchuk & Fried, 2003).

As a result, it is proposed that the CEO pay disparity has negative influences on

corporate performance and behaviours.

2.3 CEO pay disparity

CEO compensation and the gap between the CEO and other top executives

remuneration reported and supervised by the news media has been a focus of attention

from the public and society recently. The CEO pay disparity indicates the pay

differential between the CEO and other top executives. It reflects the promotion-based

tournament incentives for non-CEO executives and the managerial power of CEOs. Lin,

Shen, & Su (2009) document several characteristics of tournament theory on executive

compensation structures. First, an executive’s pay increases with the move up of his

rank. Second, the pay disparity between the first and second tire executives is the largest

within the top executive team. Third, a greater number of tournament participants are

associated with increased pay disparity, which is in line with Eriksson (1999) that the

number of participants is positively related to the tournament prize. Based on the

previous literature, there are two main measurements which include CEO pay gap

employed by Kale et al. (2009) and CEO pay slice (CPS) introduced by Bebchuk et al.

(2011). In particular, the CEO pay gap is measured as the natural logarithm of the

difference between the CEO's total compensation and the median total compensation

of all other executives in the top management team. It indicates that a large pay gap can

provide promotion-based tournament incentives for non-CEO executives. The larger

17

the CEO pay gap, the higher the efforts executives will put into work. In addition, the

CPS is the ratio of CEO pay to the total compensation of the top five executives within

the top management team. It reflects the CEO managerial power relative to the top

management team and board of directors. The larger the CPS, the more influence of

CEOs on firm decision-making.

2.3.1 Measurement one: CEO pay gap

Promotion-based tournament incentives are defined as the natural logarithm of the

difference between the CEO's total compensation and the median total compensation

of all other executives in the top management team (Kale et al., 2009). According to

the rank-order tournament theory, with a larger pay gap, the non-CEO executives have

an increased motivation to make more effort to increase their chances of promotion to

the CEO position (Lin et al., 2013; Ridge, Aime, & White, 2015). High-performing

executives with considerable managerial potential are more likely to win promotion to

the CEO position and receive commensurate pay, thereby improving firm value and

performance (Hu et al., 2013). Kale et al. (2009) document a significantly positive

relation between CEO pay gap and firm performance in US firms. This evidence

supports the rank-order tournament theory and demonstrates the effectiveness of

promotion-based tournament incentives for non-CEO executives. In particular, the

positive tournament incentive effect is more pronounced if the incumbent CEO is close

to retirement. On the contrary, the tournament incentive effect is weaker if the firm just

hired a new CEO. These findings are consistent with Ridge et al. (2015) that the

tournament incentives generated from large CEO pay gap are positively associated with

firm performance. Moreover, the effects of CEO pay gap apply to corporate behaviours,

such as firm risk-taking. For example, Kini & Williams (2012) find that a larger CEO

pay gap results in greater firm risk-taking. This finding is driven by the tournament

incentives of top executives to increase their chance of becoming the next CEO.

Therefore, senior executives prefer to undertake riskier projects and implement riskier

policies, thereby increasing firm risks (Goel & Thakor, 2008). Overall, existing

18

literature indicates that the CEO pay gap as the measurement of the promotion-based

tournament incentives influences corporate outcomes and behaviours.

2.3.2 Measurement two: CEO Pay Slice (CPS)

Bebchuk et al. (2011) introduce the CEO Pay Slice (CPS) to proxy for the relative

importance and managerial power of a CEO. CPS is defined as the fraction of aggregate

compensation of the top five members of the executive team that is captured by the

CEO. According to the managerial power theory, power is the capability of top

executives to impact the remuneration decisions made by the board of directors or the

compensation committee of the board (Finkelstein, 1992; Lambert et al., 1993). Senior

managers can pursue their self-interest to obtain high compensation (Grabke-Rundell

& Gomez-Mejia, 2002). Therefore, a larger pay gap between the CEO and other top

executives signals the relative power and dominance of the CEOs in demanding higher

remuneration. CPS is widely employed by the literature to examine its relation to firm

performance and behaviours. Using a sample of US-listed firms from 1993 to 2004,

Bebchuk et al. (2011) illustrate that a higher CPS is related to lower firm performance

measured by industry-adjusted Tobin's Q. It is also found that CPS is correlated with a

lower performance-CEO turnover sensitivity. Moreover, Chen et al. (2013) document

a significantly positive relation between CPS and the cost of equity capital. These

findings are in line with the notion that powerful CEOs are entrenched and are

associated with more severe agency problems (Bebchuk et al., 2011). Therefore, a

larger CPS indicates that the CEO plays a more dominant role among top executive

team (Jiraporn, Chintrakarn, & Liu, 2012).

In addition, the CPS as the measurement of CEO pay disparity reflects the tournament

incentives. For instance, Hu et al. (2013) find that the CEO pay gap and CPS are both

significantly and positively associated with firm performance in China. This evidence

supports the promotion-based tournament incentives for top executives. Overall, the

CPS mainly represents the CEO power and dominance within the top management team.

19

Thus, CPS as a governance mechanism has significant implications for firm behaviours

and outcomes.

2.4 CEO pay disparity and firm performance

2.4.1 CEO pay gap and firm performance

The rank-order tournament theory illustrates that a larger CEO pay disparity will

provide higher promotion-based tournament incentives for non-CEO executives,

leading to greater efforts on the part of non-CEO executives and increased firm

performance (Lazear & Rosen, 1981). The literature documents the importance of the

tournament pay structure and tournament incentives to the management team members.

Ehrenberg & Bognanno (1990) analyse the effect of the compensation structures in

professional sports tournaments on team outcomes. It is found that tournament-type pay

structures can lead to better players’ performance. This kind of compensation system is

suitable for certain groups of workers, such as firm executives, sport-team members,

and college professors. This finding is consistent with Becker & Huselid (1992) that

tournament compensation systems have a positive influence on individual performance.

What’s more, Eriksson (1999) argues that managerial compensation differentials

provide effective promotion-based incentives for senior managers to enhance firm

performance. Lee et al. (2008) support the tournament theory by showing a positive

association between pay dispersion within the management team and corporate

performance. Kale et al. (2009), investigating the US-listed firms from 1993 to 2004,

document that the compensation gap between the CEO and the next level of executives

has a significantly positive relation to firm value and accounting performance. In

particular, the positive relation is more pronounced if the incumbent CEO is nearing

retirement, and this relation is weaker if the CEO is new. Overall, empirical evidences

generated in developed economies such as Europe and the US indicate that the

tournament-type compensation structures are beneficial to both individuals and firm

performance.

20

Additionally, literature provides evidence of the positive tournament-incentives effect

in emerging markets. Hu et al. (2013) examine the relationship between the CEO pay

disparity and firm performance in China, the largest emerging economy. Consistent

with the rank-order tournament theory, CEO pay disparity provides tournament

incentives to non-CEO executives and is associated with better firm performance.

Moreover, the positive tournament-incentive effect on firm performance is subject to

firm ultimate controller and CEO political status. For example, this positive relation is

weaker in firms controlled by the government than in private firms, due to the non-

economic goals of SOEs such as maintaining social fairness (Jensen, 2001). CEO

political connection also has an incremental effect on the effectiveness of tournament

incentives. Faccio, Masulis, & McConnell (2006) find that CEOs with political

connections have the privilege to access key resources managed and provided by the

government (e.g. bank loans and favourable tax treatment) and firms benefit from the

resources. In this case, the compensation of political connected CEOs is less likely to

be fully decided by firm performance, thereby leading to lower pay-performance

sensitivity (Chen, Li, Su, & Sun, 2011).

Importantly, the positive tournament incentives effect on corporate performance is not

“one size fits all”. The effectiveness of tournament theory might be subject to the

institutional background, specific industry, and individual firm's cooperation

atmosphere. Moreover, Lin et al. (2013) advocate that a large executive pay gap is

beneficial to corporate performance in Taiwanese public-traded firms. The relation is

more pronounced in non-high-technology firms in which a large pay gap is a useful

motivation mechanism to improve executives’ work efforts and firm performance. The

positive tournament-incentives effect is not valid in high-technology companies

because a larger pay disparity might reduce the efficiency of collaboration and

coordination within the top management team. This evidence supports the finding of

Siegel & Hambrick (2005) that pay disparity within the senior executive team is

negatively correlated with corporate performance in high-technology firms since

collaboration is diminished when large pay disparities exist. So, the large pay dispersion

21

within the top management team is more detrimental to high-technology firms

compared with non-high-technology firms. Using a cross-country sample, Burns,

Minnick, & Starks (2017) investigate the CEO tournament structure and the results

support the tournament incentives. The pay difference between the CEO and other top

executives is positively correlated with firm value after controlling for endogeneity. In

addition, the tournament effect varies from firm and country culture characteristics.

Overall, a large CEO pay gap shows a positive influence on firm performance in both

developed and emerging markets.

2.4.2 CEO pay slice (CPS) and firm performance

According to the managerial power theory, a large pay disparity reflects the power and

dominance of the CEO in the firm's pay-setting process (Bebchuk et al., 2002). The

powerful CEOs might influence corporate decision-making through relative strong

power to pursue high salary for their self-benefits. It leads to more severe agency

problems that might damage the shareholder’s interests and firm value (Adams et al.,

2005; Bebchuk et al., 2011; Landier, Sauvagnat, Sraer, & Thesmar, 2012). Bebchuk et

al. (2011) investigate the relationship between CPS and firm performance for US-listed

firms during the period 1993 to 2004. CPS is employed to measure CEO pay disparity,

which is calculated as the ratio of the total compensation to the top five executives that

goes to the CEO. It is found that larger executive pay dispersion is associated with

lower firm value and accounting profitability. In particular, firms with higher CPS are

negatively correlated with stock returns after the announcements of acquisition

decisions. CPS is also related to lower CEO turnover-performance sensitivity,

reflecting the CEO dominance within the top management team. These results indicate

that CEOs in high CPS firms have more power and influence over firm decision-making,

in which leads to decreased corporate performance. Therefore, a high CPS reflects the

potential rent-seeking by the CEO and can be viewed as an agency problem. Similarly,

Jiraporn et al. (2012) adopt CPS as the measurement of CEO power and demonstrate a

consistent finding that powerful CEOs are related to poor firm performance and

outcomes. Bugeja, Matolcsy, & Spiropoulos (2017) argue that excess CPS has a

22

negative effect on firm performance, indicating the possible agency problems. Han,

Nanda, & Silveri (2016) examine the relationship between CEO power measured as

CPS and firm performance. It is found that firms with higher CPS are significantly

related to worse performance under industrywide-downturns pressure. The findings

also support that CPS is a useful indicator of CEO dominance, and higher CPS leads to

worse corporate performance. Correa & Lel (2016) examine the influences of CEO pay

dispersion on firm valuation by using a large sample of firms from 38 countries during

the period of 2001 to 2012. Say on pay (SoP)2 laws as a quasi-exogenous shock narrow

the pay inequality between the CEO and other top executives. Compared with the firms

without passing the SoP laws, the value of the firms that passed the SoP laws

significantly enhanced. The results are in line with the findings of Bebchuk et al. (2011)

that high CPS reflects CEO entrenchment that is harmful to firm value.

Literature also documents the positive effect of CPS on firm performance. For example,

Al-Najjar et al. (2016) find a significantly positive relation between CPS and firm

performance in UK listed firms from 2003 to 2009. They argue that CPS reflects

managerial talent rather than managerial power. CEOs with outstanding abilities and

skills can be rewarded relatively higher salary within the top management team. They

find that CPS will be higher if a firm has better corporate governance disclosure,

indicating that well-governed companies attract high talented CEOs. In addition, the

effect of CPS on firm performance is subject to institutional background. UK public

listed firms developed strengthened internal governance and established relative

independent remuneration committees. Thus, the pay-setting process is less likely to be

intervened by powerful CEOs. Besides, the positive effect of CPS on firm performance

is also applicable in China. Hu et al. (2013) find that higher CPS leads to better firm

performance and they argue this positive effect is driven by tournament incentives. The

result is consistent with Burns et al. (2017) who find that the pay difference between

the CEO and other top executives measured by CPS is correlated with enhanced firm

2 Say on pay is a term used for a role in corporate law whereby a firm’s shareholders have the right to

vote on the remuneration of executives.

23

value using a cross-country sample includes China and UK. Overall, this line of

research about CPS provides inconclusive evidence.

All in all, prior literature on CEO pay disparity focuses on the economic consequence,

e.g. firm value and performance. However, the rank-order tournament theory and

managerial power theory are not “one size fits all” since the role of CEO pay disparity

is subject to many factors such as institutional background in different countries and

companies.

2.5 CEO pay disparity and earnings management

The promotion-based tournament incentives for top executives influence not only firm

performance but also earnings management behaviour. Earnings management is the use

of accounting techniques to produce financial reports that present an overly positive

view of a company's business activities and financial position to obtain some private

gain (Schipper, 1989). Accounting information is a critical element in the Chinese

regulators’ administrative governance of listed firms (Liu & Lu, 2007). For instance,

minimum ROE hurdles must be met to gain approval for rights issues, and regulators

will mark the companies as potential delisting companies if they report net losses over

three sequential years (Chen & Yuan, 2004; Haw, Qi, Wu, & Wu, 2005; Liu & Lu,

2007). Given such accounting regulations, top executives have incentives to manipulate

reported earnings. On the one hand, to help firms meeting specific accounting

information hurdles; On the other hand, to help themselves increasing financial wealth

as well as keeping career security (Bergstresser & Philippon, 2006).

In particular, senior managers have financial incentives to increase their performance-

based and equity-based compensation by engaging in earnings management

(Bergstresser & Philippon, 2006; Burns & Kedia, 2006; Healy, 1985; Jiang et al., 2010).

For example, CFOs have the primary responsibility in the firm’s overall financial

reporting. CFOs’ financial incentives should play an important role in earnings

management (Jiang et al., 2010). In terms of the non-CEO executives, most of them

carry out as well as oversee the firm’s daily operational decisions. Thus, the tournament

24

compensation structure may provide them with strong financial incentives to engage in

earnings management (Park, 2017). According to the tournament theory, most increases

in top executive pay occur due to a promotion to a higher ranked position rather than

continued service in the same position (Eriksson, 1999; Lazear, 1992; Lazear & Rosen,

1981). In this case, becoming the next CEO is attractive to non-CEO executives for

increased compensation. In terms of the career concerns of senior managers, Demers &

Wang (2010) find that older executives are more likely to engage in both accruals-based

and real earnings management than younger executives. This finding supports the

career incentives in earnings management. Overall, with a larger CEO pay gap, non-

CEO executives are more motivated to manipulate reported earnings for their private

interests. Therefore, a large pay gap between the CEO and other top executives provide

potential promotion-based tournament incentives for non-CEO executives to conduct

earnings management.

In addition, CEOs are highly incentivised to engage in earnings management for their

financial interests, including performance-based and stock-based compensation

(Bergstresser & Philippon, 2006; Cheng & Warfield, 2005). According to the

managerial power theory, a large CEO pay gap reflects the relative power and influence

of CEOs in demanding higher compensation (Bebchuk et al., 2011). Besides, the career

incentives lead to powerful CEOs to manipulate reported earnings (Mande & Son,

2012). With a greater pay gap, dominant CEOs have an increased motivation to protect

and enhance both their financial wealth and job security. Also, powerful CEOs are more

likely to lead to a breakdown of good governance (Bebchuk et al., 2011; Chen et al.,

2013). For instance, larger CEO pay dispersion is correlated with a lower sensitivity of

CEO turnover to performance (Bebchuk et al., 2011) and a higher likelihood of the

CEO also holding the chairman position (Bebchuk et al., 2011; Faleye, Reis, &

Venkateswaran, 2013). Under these circumstances, powerful CEOs might influence

firm decision-making for their self-benefits but harm shareholders’ interests. Overall,

powerful CEOs could be more likely to manipulate reported earnings because they want

to maintain high firm performance to avoid adverse compensation and career

25

consequences. That is, a large pay disparity incentivises powerful CEOs to engage in

earnings management for their self-interests.

Park (2017) investigates the relationship between the CEO pay dispersion and earnings

management behaviours in the US-listed firms from 1994 to 2013. The CEO pay gap

(Kale et al., 2009) and CPS (Bebchuk et al., 2011) are both employed to measure the

CEO pay disparity within the top management team. It is found that CEO pay disparity

has a significantly positive impact on earnings management through real activities

manipulation (RAM) as most top executives oversee the daily operational decisions.

The compensation gap between the CEO and the CFO leads to more accrual-based

earnings management because of the finance and accounting expertise of the CFO. Both

relations are driven by short-term pay (salary and bonus) dispersion rather than long-

term pay (stocks and options) dispersion. They argue that the competitions of being

promoted to CEO provide tournament incentives for non-CEO executives to engage in

more earnings manipulations. These findings are consistent with the idea that large

tournament prize leads to extremely aggressive and competitive behaviours (Siegel &

Hambrick, 2005).

Overall, CEO pay disparity influences corporate earnings management. On the one

hand, the large pay disparity provide tournament incentives for non-CEO executives to

engage in earning management in order to enhance their chances of promotion to the

next CEO. On the other hand, dominant CEOs who receive relatively higher

compensation may lead to more earnings management activities for their own salary

and career security. Therefore, a large CEO pay disparity increases the intensity of

earnings management because of the tournament prizes for non-CEO executives as well

as the CEO power.

2.6 CEO pay disparity and firm behaviours and output

According to rank-order tournament theory, the promotion-based tournament

incentives push top executives to work harder for increased chances of becoming the

next CEO (Lazear & Rosen, 1981). Large tournament prize of senior managers leads to

26

extremely aggressive and competitive behaviours (Siegel & Hambrick, 2005). Kini &

Williams (2012) examine the tournament incentives effect of top executives on firm

risk and corporate policies. It is found that CEO pay gap is significantly and positively

associated with risk-taking in both non-financial and financial companies. Besides, this

positive tournament incentive effect results in riskier policies such as more R&D

investment and higher firm leverage. These results are consistent with the finding of

Goel & Thakor (2008) that the tournament prizes highly motivate top executives to

increase their chances of promotion to CEO by taking more risks. Further, the

tournament compensation structures have the potential to meet the requirement of

employers who want their employees to take more risk and not careless.

In addition, the promotion-incentives effect may also result in other activities. Haß et

al. (2015) find a significantly positive relationship between CEO pay gap and corporate

fraud. It indicates that the non-CEO executives are more likely to engage in fraud to

increase the chance of winning the tournament prizes. Zhang, Huang, & Habib (2018)

suggest that tournament incentives measured as CEO pay gap has a negative effect on

the firm’s financial restatements in Chinese listed firms. It is found that both core and

non-core financial restatement are reduced in firms with larger gap disparity between

the CEO and top executives. Kubick & Masli (2016) support the effective influence of

tournament incentives on CFO. It is found that the compensation gap between CEO and

CFO has a positive relation with tax aggressiveness. Overall, the CEO pay disparity

can provide top executives with promotion-based incentives, thereby leading to more

aggressive and competitive behaviours.

The managerial power theory suggests that powerful CEOs are more related to agency

problems that influence firm behaviours and outcome (Bebchuk et al., 2011). For

example, Chen et al. (2013) investigate the relationship between executive pay disparity

(CPS) and the cost of equity capital. They find that the pay dispersion between the CEO

and other top executives is associated with a higher cost of capital. Chintrakarn,

Chatjuthamard, Tong, & Jiraporn (2018) document that higher CPS lead to a reduced

probability of paying dividends. This evidence supports the agency theory that dividend

27

payouts are detrimental to the firm in the view of CEOs since the dividends will

decrease the free cash flows of firms. Thus, powerful CEOs are more related to lower

dividend payouts. Therefore, the CPS reflects the CEO dominance that will affect the

firm outcome and behaviours.

Overall, the large CEO pay disparity provides promotion-based incentives to non-CEO

executives and reflects the relative power of CEOs, and both play an important role in

firm behaviours and outcomes.

28

3. Essay one

CEO pay disparity and firm performance: New evidence from China

3.1 Introduction

CEO pay disparity in recent years has become one of the corporate governance research

interests that attracts a lot of attention. As the top management team is responsible for

firms’ daily operations and profitability, a proper corporate compensation structure is

essential to incentivise top executives to make great efforts and improve firm

performance. In particular, the pay disparity between the CEO and other top executives,

as the key to the executive compensation design, plays an important role in the inner

workings of the top management team (Bebchuk et al., 2011).

In this essay, I investigate the relationship between CEO pay disparity and firm

performance using Chinese data. China as the second-largest economy provides an

interesting setting to examine such a research topic due to its unique institutional

mechanisms. China’s corporate governance system is poor, and the outside investor

protection is insufficient (Firth et al., 2006). Moreover, the extremely high salary

compared to lower-level employees and the widening pay gap of senior executives have

attracted substantial public attention and caused significant controversy in society since

the disclose of individual compensation of senior executives in 2005. The Central

Government of China has introduced a series of regulations to mandate the

compensation of top executives to mitigate the strong social complaints about pay

inequality. For example, the Chinese central government put forward a regulation to

limit executive salaries for the country’s centrally-controlled state-owned enterprises

(CSOEs)3 in 2009. In 2014, a stricter “pay ceiling” regulation was announced to further

limit the compensation of top executives in CSOEs. This regulation was officially

3. State-owned enterprises (SOEs) in China are either controlled by the central government (CSOEs) or

local governments (LSOEs). The central government directly controls and manages strategic SOEs

through the State Assets Supervision and Administration Commission (SASAC).

29

implemented from January 1, 2015, and gradually implemented to SOEs owned by the

local governments (LSOEs). Therefore, the CEO pay disparity is expected to play a

critical role in firm performance in China’s listed firms.

My study makes several contributions to the literature. First, I add evidence on the

influence of CEO pay disparity on firm performance. Existing studies have examined

the relationship between pay disparity and corporate performance, but controversy

remains in this line of research. Most of the existing studies in this area such as Kale et

al. (2009), Bebchuk et al. (2011), Chen et al. (2013), and Al-Najjar et al. (2016) are

conducted utilising data from Western industrialised societies. It may not be appropriate

to draw general conclusions about the role of CEO pay disparity without evidence from

emerging economies. In this study, I document that the CEO pay disparity measured by

both the CEO pay gap (Kale et al., 2009) and CPS (Bebchuk et al., 2011) is positively

associated with firm performance in China’s listed firms. This is in line with the rank-

order tournament theory, which argues that a larger CEO pay gap provides greater

tournament incentives for non-CEO executives to work harder for increased chances of

promotion to the CEO position (Kale et al., 2009; Lazear & Rosen, 1981). However,

the positive relation between CPS and performance in China is not consistent with

managerial power theory, which indicates that higher CPS reflects more CEO power

that leads to more agency problems and decreased firm performance (Bebchuk et al.,

2011; Finkelstein, 1992). The results in this study suggest that higher CPS in China

reflects positive tournament effects and it supports the rank-order tournament theory.

Second, to our best knowledge, this could be the first to focus on the characteristics of

non-CEO executives to explore their sensitivity to tournament incentives. Previous

literature mainly focusses on how CEOs’ characteristics impact the tournament

incentives for other top executives. Very few studies pay attention to whether

tournament incentives are driven by the non-CEO executives’ characteristics. This

study explores the tournament effects based on non-CEO executives’ personal

characteristics and provides more robust evidence supporting the positive influence of

CEO pay disparity on firm performance. In particular, I examine whether the

30

tournament incentives are shaped by non-CEO executives’ age and gender. By

conducting the subsample analysis, I find that the CEO pay gap does not play a role if

the non-CEO executives are neither too old nor too young. The ambition of older top

executives to higher positions is minor, and younger executives could be more active

in job-hopping that can give them higher salaries and better positions. Besides, the

positive tournament effects on firm performance are not significant only if the female

ratio within the non-CEO executive team is equal and larger than 50%. Female

executives are more risk-averse (Byrnes et al., 1999; Charness & Gneezy, 2012) that

makes them more conservative, thereby, leading to less incentives to promotion

compared to males.

Third, to our best knowledge, this is the first study to investigate the effects of the 2015

“pay ceiling” regulation on the relationship between CEO pay disparity and firm

performance. This study finds that the CEO pay gap is positively associated with firm

performance in both the pre-regulation and post-regulation periods in SOEs subsample.

It indicates that the positive effects of CPG on performance are not driven by the

regulation. However, this result is not robust in the subsample of SOEs that are

controlled by government bureaus because they could be more sensitive to political

objectives. It is found that the positive effect of CPG on performance is not significant

in the post-regulation period in SOEs controlled by government bureaus. Therefore, the

“pay ceiling” regulation reduces the tournament incentives of non-CEO executives in

SOEs directly controlled by government bureaus.

In addition, the industry concentration measured by HHI influences the efficiency of

tournament effects in SOEs. In highly concentrated industries, the CPG has no

significantly impact on firm performance in SOEs subsample. This finding indicates

that the positive tournament effect is not applied to monopoly industries.

31

3.2 Literature review and hypothesis development

3.2.1 CEO pay disparity

CEO pay disparity is defined as the pay differential between the CEO and other top

executives. There are two competing theories on the role of CEO pay disparity to firm

performance. The first one is the rank-order tournament theory that indicates a large

CEO pay disparity provides great tournament incentives for non-CEO executives to

compete for the CEO position (Lazear & Rosen, 1981). The second one, which we call

managerial power theory, sees a large CEO pay disparity reflects the relative power and

dominance between the CEO and other top executives. Both theories predict that the

CEO pay disparity can be related to firm performance.

3.2.2 Rank-order tournament theory

According to the tournament theory, a large CEO pay disparity provides non-CEO

executives with strong tournament incentives to make greater effort to increase the

likelihood of becoming the next CEO (Lazear & Rosen, 1981). The level of employee

compensation stepped increase with the promotion of positions since the rank-order

tournaments are schemes of relative performance evaluation and the managerial skills

are hard to quantify. A CEO as the leader within top executives is required to have firm-

specific skills to run a firm. However, a company cannot rely on the CEO alone but the

hard work and skills of the entire top management team. Besides, these CEO skills are

not beneficial to other top executives if they do not intend to work for a long time in

the firm. Particularly, these skills become useless when non-CEO executives leave the

firm. Thus, providing non-CEO executives with incentives to stay for the long term and

develop their abilities is very necessary to run the firm. There are mainly two

advantages of a large pay disparity between the CEO and other top executives. First,

the relatively higher compensation level for CEOs can attract and encourage them to

do their best for better performance. More importantly, a large pay disparity can

motivate non-CEO executives to make more efforts on working for higher rank with

more salaries (Goel & Thakor, 2008; Haß et al., 2015; Kini & Williams, 2012). Thereby,

32

a large pay disparity helps to build a large pool of skilled internal candidates to compete

for the CEO position (Chen et al., 2013).

Overall, this tournament perspective indicates that a large CEO pay disparity provides

tournament incentives for other top executives and incentivises to work hard, which is

beneficial to corporate performance (Eriksson, 1999; Hu et al., 2013; Kale et al., 2009).

The CEO pay gap, defined as the natural logarithm of difference between the CEO's

total compensation and the median total compensation of all other executives in the top

management team, is used to measure such tournament incentives (Kale et al., 2009). I

suppose that a large CEO pay gap has positive influence on firm performance in China.

The above discussions lead to my first hypothesis:

H1: The CEO pay gap is positively associated with firm performance.

3.2.3 Managerial power theory


will to corporate decision-making (Finkelstein, 1992; Hickson et al., 1971). A powerful

CEO could exert his desires on the remuneration decisions for their self-interests rather

than shareholder’s interests (Lambert et al., 1993). According to the managerial power

theory, a large CEO pay disparity reflects the relative strong power of a CEO to other

top executives (Bebchuk et al., 2011; Bebchuk & Fried, 2003). With the larger CEO

pay disparity, CEOs have more incentives to protect their self-interests such as financial

wealth and career security. Therefore, a powerful CEO is associated with more CEO

entrenchment and more agency problems (Adams et al., 2005; Bebchuk et al., 2011).

Consistent with this perspective, Bebchuk et al. (2011) document that a large CEO pay

disparity is associated with low CEO turnover sensitivity to performance and worse

firm performance.

In addition, a powerful CEO may unwilling to develop other top executives skills or

may even hinder their career development, because high-quality executives as the

potentially internal CEO successor candidates could harm CEO’s career and financial

security (Rajan & Wulf, 2006). Thus, poor inside promotion incentives for non-CEO

33

executives could result in more job-hopping for high skilled or talented executives,

thereby, leading to worse firm performance. For instance, high ability insiders are rare

in firms with more entrenched CEOs (Masulis & Mobbs, 2011). Bebchuk et al. (2011)

introduced the CEO pay slice (CPS), defined as the ratio of the total CEO pay to the

sum of the total pay of the top four executives plus CEO pay, to measure the managerial

power of CEOs. Overall, the managerial power view suggests that a large CEO pay

disparity is associated with reduced firm performance. Therefore, I have the following

hypothesis:

H2: The CEO pay slice is negatively associated with firm performance.

However, most literatures examine the relationship between CPS and firm performance

using US data, and the conclusions may not apply to other countries. For example, some

literature documents the positive effects of CPS on firm performance. Al-Najjar et al.

(2016) find that CPS is associated with better firm performance in UK listed firms from

2003 to 2009. They argue that CPS reflects a CEO’s managerial talents rather than

managerial power. CEOs with outstanding abilities and skills can be rewarded

relatively higher salary within the top management team. Besides, Hu et al. (2013)

document that CPS plays positive tournament roles in firm performance in China. These

findings are consistent with Burns et al. (2017) who find that pay difference between

the CEO and other top executives measured by CPS is associated with enhanced firm

value using a cross-country sample includes China and UK. Therefore, I expect the CPS

is positively associated with firm performance in China.

H3: The CEO pay slice is positively associated with firm performance.

3.3 Sample and variable construction

3.3.1 Data

The initial sample of this study includes all Chinese companies listed in A-share

markets in the Shanghai and Shenzhen Stock Exchanges from 2005 to 2017 (the data

will be updated to 2018 and later). All data are collected from the China Listed Firms

34

Research Database of China Stock Market and Accounting Research (CSMAR). The

starting year of our sample is 2005 when the listed firms started to disclose the

compensation of top executives (including Chairman of the Board, CEO, and other top

executives). Only the aggregate amount of payment to the top three executives were

disclosed in firm annual reports before 2005.

Following the prior literature, financial firms and special treatment (ST) firms are

excluded because of their unique accounting standards. We also remove observations

with missing information and delete the observations with extreme values. The final

sample includes 3,091 firms that consist of 20,760 firm-year observations.

3.3.2 Variable construction

3.3.2.1 Measuring CEO pay disparity

Following Kale et al. (2009) and Bebchuk et al. (2011), I use two measures to measure

the CEO pay disparity: CEO pay gap (CPG) and CEO pay slice (CPS). CPG is defined

as the natural logarithm of the difference between CEO pay and the median pay of all

other executives in the top management team.

CPG = Ln (Total compensation of CEO - Median of total compensation of other

executives in the firm-year).

CPS is defined as the fraction of aggregate compensation of the top five members in

the executive team that is captured by the CEO. In particular, the top five members

include the CEO plus the four highest paid executives excluding the CEO.

CPS = Total compensation of CEO / (Total compensation of top four executives +

Total compensation of CEO).

An executive's total compensation is the sum of salary, bonuses and other cash

compensation. This compensation does not include long-term incentives such as stock

options and restricted stocks, because these are rarely exercised in China.

35

3.3.2.2 Measuring firm performance

Following Liu, Miletkov, Wei, & Yang (2015), I use two accounting measures to

represent firm performance: return on assets (ROA) and return on equity (ROE). ROA

is calculated as net income divided by total assets and ROE refers to net income divided

by total equity. Liu, Wei, and Xie (2014) suggest that the market-based measures such

as Tobin's Q and stock returns are not proper performance measures for Chinese listed

firm because Chinese stock ownership underwent significant reform4 during our sample

period.

3.3.2.3 Control variables

I include CEO age, CEO gender, CEO tenure, CEO duality, firm size, board size, board

independence, leverage, largest shareholder ownership and firm age as control variables.

Appendix A provides definitions for all variables.

3.3.3 Descriptive Statistics and correlation matrix

Table 1 provides the basic summary statistics of the variables employed in this study.

The mean CEO compensation is 637,991 RMB that is significantly greater than average

median-compensation of non-CEO executives, which is 417,327 RMB. The mean CEO

pay gap is 220,664 that is in line with the existence of tournaments. The average CPS

is 24.89%, which shows that total CEO compensation accounts for about one-fourth of

total compensation of the top five paid executives. In addition, 94.56% of CEOs are

male, and 24.07% of CEOs also hold the position of Chairman of the board. The

average proportion of independent directors is 36.90%, which satisfies the requirements

of the China Securities Regulatory Commission (CSRS) that independent directors

must account for at least one-third of the total numbers on boards for all listed firms.

4. The Chinese state ownership reform in 2005 required that the listed firms gradually convert their non-

tradable shares into tradable shares. The ownership reform was basically completed by 2007. However,

the former non-tradable shareholders still face a number of restrictions on share trading in terms of, for

instance, the percent of shares allowed to be traded and the lockup period (Haveman and Wang, 2013).

36

Insert Table 1 here

Table 2 reports the time trend of CEO pay disparity, top executives’ compensations and

firm performance measures included in this study. Panel A shows that the senior

executives’ compensation and CEO pay gap both have a significant increase from 2005

to 2017. The ROA and ROE in 2008 are relatively low that indicates the influence of

2008 financial crisis. Panel B and Panel C show the time trends in SOEs and private

firms, respectively. Compared with private firms, the salaries for CEOs and other top

executives are higher in SOEs even though SOEs’ performance is worse. Moreover, the

CEO pay gap in private firms is greater than that in SOEs. It could reflect more

tournament incentives in private firms.

As shown in Panel B, the mean CEO pay gap of SOEs has a significantly reduce in year

2015 because of the implement of the “pay ceiling regulation”. We can observe the

mean CEO compensation of SOEs has a minor decrease, but non-CEO executives’

average salaries are still increase in year 2015. This makes the decrease of CEO pay

gap in SOEs. According to Panel C, the CEO and other top executives’ compensation,

as well as CEO pay gap are all increasing year by year in private firms since they are

not affected by the “pay ceiling” regulation.

Insert Table 2 here

Table 3 shows the correlation matrix between used variables. Both CPG and CPS have

positive correlations with ROA and ROE. Most of the correlations reported are between

-0.20 and 0.20. The highest correlation is between ROA and ROE at 0.796, and the

second highest correlation is between CPG and CPS at 0.642. It is reasonable because

ROA and ROE measure firm performance and CPG and CPS measure CEO pay

disparity. Overall, the correlations do not indicate any serious multicollinearity

problems.

Insert Table 3 here

37

3.3.4 Empirical analysis

3.3.4.1 CEO pay disparity and firm performance in China

I conduct the following regression to investigate the influence of CEO pay disparity on

firm performance. Table 4 contains the baseline regression results after controlling for

industry and year effects. Firm performance is measured by both ROA and ROE. CEO

pay disparity is measured by the CPG and CPS in each regression, respectively.

Firm performance = 𝛼 + 𝛽1CEO pay disparity + 𝛽2LnCEO age + 𝛽3CEO duality +

𝛽4CEO gender+ 𝛽5LnCEO tenure + 𝛽6LnBoard size + 𝛽7LnBoard independence +

𝛽8Leverage + 𝛽9Firm size + 𝛽10LnFirm age + 𝛽10Largest shareholder + 𝜀

The results of Models 1 and 2 show that the estimated coefficients on CPG are 0.029

and 0.053 and both are significant at the 1% level, meaning that CPG is positively

associated with firm performance. These results support the rank-order tournament

theory that a large CEO pay disparity provides non-CEO executives with tournament

incentives that leads to better firm performance. Similarly, Models 3 and 4 document

the positive and significant relationship between CPS and firm performance at the 1%

level. It indicates that a higher CPS leads to better firm performance in China. This

finding is not consistent with managerial power theory but supports the tournament

theory. Thus, CPS does not reflect the CEO power but the tournament incentives for

other top executives.

CEO tenure is significantly and negatively related to firm performance which means

CEOs with longer tenure leads to worse firm performance. In addition, firms with

higher debt ratio measured by Leverage are significantly associated with worse

performance. The positive coefficients on Firm size indicate that larger firms perform

better.

Insert Table 4 here

38

3.3.4.2 CEO pay disparity and firm performance, robustness check

It is a challenge to establish the causal relationship between CEO pay disparity and firm

performance because of the endogeneity problems. Managerial pay disparity is not an

exogenous random variable. It is impossible to randomly assign observations to a

treatment or control group, thus, selection bias is a potential issue associated with

collecting empirical data. In addition, reverse causality between CEO pay disparity and

firm performance is uncertain. Palia (2001) suggests that managerial compensation and

firm performance are jointly determined. Thus, firm’s performance might impact the

pay disparity between the CEO and other top executives rather than CEO pay disparity

affects firm performance. For instance, the performance-based compensation and pay

gap would be larger if the firm performance is better. Therefore, reverse causality is an

issue to approve a positive association between CEO pay disparity and firm

performance.

Following Armstrong, Jagolinzer, & Larcker (2010), I address the above problems by

employing the propensity score matching (PSM) approach. The aim of the PSM is to

produce two statistically similar samples with high-and low-pay disparity, respectively.

First, firm-year observations are allocated to the treatment and control groups based on

the level of the pay disparity. Specifically, a firm-year observation is allocated to the

treatment group if its CEO pay disparity is above the 75% percentile of the pay disparity

of that year. A binary variable equal to one is constructed if the pay disparity is above

the 75% percentile value and zero if it is below the 75% percentile value. Next, to

perform the PSM analysis for high-pay disparity versus low-pay disparity firms, the

propensity score is calculated as a function of CEO characteristics and other firm-level

control variables. Then, I compare average firm performance between the treatment

(high-pay disparity) and control groups (low-pay disparity) since they are statistically

similar in all other relevant characteristics that may impact firm performance. The

sample consists of 10,374 / 10,370 firm-year observations.

39

Table 5 displays the model to estimate the propensity scores. I first estimate a probit

model to predict the determinants of the pay disparity dummy. CEO gender is not

included in this regression because near 95% CEOs are males, and it could affect the

efficiency of matching. CPG75 and CPS75 are used to measure CEO pay disparity. The

regression specification is as follows:

CEO pay disparity = 𝛼 + 𝛽1LnCEO age + 𝛽2CEO duality + 𝛽3LnCEO tenure +

𝛽4LnBoard size + 𝛽5Board independence + 𝛽6Leverage + 𝛽7Firm size + 𝛽8LnFirm age

+ 𝛽9Largest shareholder + 𝜀

Table 5 presents that both CPG and CPS are significantly higher in firms with a CEO

who has longer tenure or also holds the chairman position. The results show that

powerful CEOs achieve higher salaries as CEO duality and CEO tenure are the reflects

of CEO power. Besides, the Board independence is negative related to both CPG and

CPS which indicates the monitoring role of independent directors. The negative

coefficient on Leverage shows that the salary difference between the CEO and other

top executives is lower in firms with higher debt ratio. In addition, the CEO pay

disparity is lower if the firm’s largest shareholder holds more shares. These results

indicate that the CEO pay disparity level is determined by some CEO characteristics,

board composition and firm specific factors.

Insert table 5 here

Second, I use the propensity scores estimated from Table 5 to perform a one-to-one

PSM procedure. It produces two statistically similar samples with high-CEO pay

disparity and low-CEO pay disparity, respectively. Table 6 contains Panel A and Panel

B. Panel A is the t test of the difference between high and low CEO pay disparity to

firm performance. Panel B reports the OLS regression model as same as Table 4 using

the PSM sample.

In Panel A, ROA of the treatment group is statistically higher than that of the control

group (t statistic = 16.18). A similar pattern is found for using ROE as performance

measure. The average ROE of the treatment group is 0.0994, compared with 0.0692 of

40

the control group. The difference is 0.0301 that is statistically significant (t statistic =

16.41). Besides, I find similar significant and positive results when using CPS75

measuring pay disparity. These results show that CEO pay disparity is significantly

associated with better firm performance measured by ROA and ROE at the 1% level,

which is in line with the findings of Table 4.

Panel B reports the estimates of the regression results of CEO pay disparity on corporate

performance using the PSM sample. As shown in Panel B, CEO pay disparity is

significantly and positively associated with corporate performance measured by both

ROA and ROE. The results are consistent with the baseline findings of Table 4. It

indicates the positive tournament effect is robust after addressing sample selection bias.

Thus, a large CEO pay disparity provide non-CEO executive with tournament

incentives that leads to enhanced firm performance in China. The CEO pay disparity

shows as a corporate governance mechanism to improve firm performance.

Insert Table 6 here

3.3.5 CEO pay disparity and firm performance, sub-sample analysis

Next, I conduct the subsample analysis to examine whether the positive influence of

CEO pay disparity on firm performance is robust, based on different settings. CPG is

mainly used to present the CEO pay disparity in sub-samples. Besides, ROA is mainly

employed to represent firm performance.

3.3.5.1 CEO pay disparity and firm performance: SOEs and private firms

First, I examine whether the enhanced firm performance through large CEO pay

disparity applies to both SOEs and private firms. I split the full sample into subsamples

of SOEs and private firms basing the ultimate controller of sample firms. SOEs

subsample includes the firms whose ultimate controllers are government, and private

firms are the firms whose ultimate controllers are private firms or individual person.

Then, I re-run the baseline regression (Table 4) using the subsample of SOEs and

private firms, respectively.

41

Table 7 shows that the positive relationship between CEO pay disparity and firm

performance exists in both SOEs and private firms. It indicates that CEO pay disparity,

as a corporate governance mechanism, plays an important role in enhancing firm

performance in China. Thus, a large CEO pay disparity provides promotion-based

tournament incentives for non-CEO executives that lead to better firm performance.

Insert Table 7 here

3.3.5.2. CEO pay disparity and firm performance: Pre and Post “pay ceiling”

regulation period

Considering about the 2015 pay ceiling regulation only applied to SOEs, I conduct a

sub-sample analysis to examine whether the positive tournament effects are driven by

the regulation. By dividing the SOEs sample into pre-regulation (before 2015) and post-

regulation (after 2015) subsamples, I find that the CPG is positively associated with

ROA in both the pre and post regulation periods as shown in Panel A. It indicates the

positive effects of CPG on performance are not driven by the regulation. However, CPS

is not significantly related to ROA in neither pre-nor post-regulation period in SOEs.

Panel B shows the CPG and CPS are both positively related to ROA in pre and post

period in private firms. Thus, the regulation does not weaken the efficiency of positive

tournament effects in private firms.

In Panel C, I conduct a subsample that only includes the SOEs directly controlled by

government bureaus to further examine how the regulation affects the tournament

effects. SOEs directly controlled by government bureaus should be more sensitive to

the pay ceiling regulation. Panel C shows that the significantly positive relationship

between CPG and ROA becomes insignificant after year 2015. This finding indicates

that the non-CEO executives’ promotion incentives are mitigated by the regulation.

Therefore, the positive tournament effects are more pronounced in SOEs who are

directly controlled by government bureaus in the pre-regulation period.

Insert Table 8 here

42

3.3.5.3 CEO pay disparity and firm performance: does industry concentration

matter

It is supposed that the industry concentration could impact the positive tournament

effects. The tournament incentives for non-CEO executives are subject to outside career

market, and the outside job market is subject to industry concentration. For example,

outside job selections for top executives will be greater if their firms are in the

competitive industries and the outside opportunities are limited if firms are in the

monopoly industries. Herfindahl-Hirschman Index (HHI) is employed to measure the

industry concentration and determine industry competitiveness. The range of HHI is

from 0 to 1, and a large HHI indicates a high concentration of industry.

𝐻𝐻𝐼 =∑(𝑋𝑖/𝑋)2

𝑁

𝑖=1

=∑𝑆𝑖2

𝑁

𝑖=1

Where Xi refers to the operating revenue for a specific firm in its industry; X is the total

operating revenue for all firms in the given industry.

Based on the HHI of each industry-year, I divide the full sample into three sub-groups

that include highly competitive industries (HHI in the bottom 25% range), highly

concentrated industries (HHI in the top 25% range), and medium concentrated

industries (HHI is in between). Table 9 shows the relationship between CPG and ROA

in three sub-samples. Panel A shows that CPG is significantly and positively associated

with ROA in SOEs from highly competitive and medium concentrated industries.

However, this relationship changes to be insignificant in highly concentrated industries,

indicating that the positive tournament effect is not apply to monopoly industries. Panel

B shows that in private firms, the positive relationship between CPG and ROA is always

significant regardless industry competitiveness.

The different results between SOEs and private firms could come from the promotion

difficulties of non-CEO executives and the political objectives of top executives in

SOEs. The opportunity of promotion to CEO position for non-CEO executives is harder

in SOEs than private firms because CEOs in SOEs are appointed by the government.

43

Moreover, non-CEO executives not only focus on monetary incentives but also political

incentives. These could be the reasons why industry competitiveness shapes the

relationship between CPG and ROA in SOEs. In contrast, the promotion chances are

relatively fair for top executives in private firms, thus, the relationship is consistent

regardless of industry competitiveness.

Within the SOEs, the non-CEO executives’ tournament incentives may not play a role

in highly concentrated industries since their current firms have the monopoly power

and outside career markets are very limited. Moreover, the monopoly SOEs are very

important for the nation’s economy and the CEO selection process could be driven by

multiple factors including political and social objectives. Considering about the

importance of CEO position in monopoly SOEs, CPG may have limited effect on firm

performance.

Insert Table 9 here

3.3.5.4 CEO pay disparity and firm performance: does non-CEO executives’ age

matter

The age of non-CEO executives may moderate the role of CEO pay disparity on firm

performance. I conduct the subsample based on the average age of non-CEO executives.

It shows in table 10 that CPG is positive associated with ROA if non-CEO executives’

average age is between 41 and 51. However, the positive relation becomes insignificant

if the average age of non-CEO executives is old (>=51) or young (<=41). Younger top

executives could be more active in job-hopping that can give them higher salary and

better positions, because they are more willing to take more risk (Hambrick & Mason,

1984; Prendergast, 2002). If the non-CEO executives’ team is young, some of them

might be more willing to move for better positions rather than stand still. However,

older senior executives could be more conservative (Hambrick & Mason, 1984), thus,

their ambition to higher position tends to be limited. If the ages of non-CEO executives

are relatively high, some of them may prefer to enjoy life until retirement. Their

44

incentives for promotion could be less. Therefore, the efficiency of positive tournament

effects is found to be subject to the non-CEO executive’s age.

Insert Table 10 here

3.3.3.5 CEO pay disparity and firm performance: does non-CEO executives’

gender matter

The gender of the top management team is another important aspect and literature has

already documented that women are more risk-averse than men. I conduct the sub-

sample analysis based on the female ratio within non-CEO executives to examine

whether the positive tournament effects are shaped by gender effects. As shown in

Table 11, the positive influence of CPG on ROA is robust if the female ratio of non-

CEO executives is lower than 50%. On the contrast, CPG does not have a significantly

positive effect on ROA if at least half number of top executives are female. These

findings indicate that the tournament incentives are subject to non-CEO executives’

gender. Female managers tend to be more risk-averse (Byrnes et al., 1999; Charness &

Gneezy, 2012), thus, females could be less active in job-hopping and more likely to be

happy with staying in current firm compared with males.

Insert Table 11 here

3.4 Conclusion

In this study, I investigate the influence of CEO pay disparity on firm performance.

Using a sample of Chinese listed firms from 2005 to 2017, I document that CEO pay

disparity is significantly associated with better firm performance. Similar findings are

demonstrated after addressing the endogeneity issues. These findings support the rank-

order tournament theory that a large CEO pay disparity provides non-CEO executives

with large tournament incentives, thereby, leading to enhanced firm performance.

I further document that the robustness of the positive tournament effects is subject to

the executives’ characteristics and industry concentration. For example, the positive

tournament effect become insignificant if non-CEO executives team is older or younger.

45

The ambition of older top executives to higher position is limited, and younger

executives could be more active in job-hopping. Besides, I find that the positive

influence of CEO pay disparity on firm performance is insignificant if the female ratio

within non-CEO executives is greater than 50% since female executives are more risk

averse. Moreover, it is found that the tournament effects do not play a role in highly

concentrated SOEs.

In addition, I investigate the effect of year 2015 “pay ceiling” regulation on the

relationship between CEO pay disparity and firm performance. I find that the positive

tournament effect is robust in SOEs in both the pre- and post-regulation subsample

periods. However, the positive effect of CEO pay disparity is not significant in the post-

regulation period in SOEs directly controlled by government bureaus. The result

indicates reason that the SOEs directly controlled by government bureaus are more

sensitive to the government regulation. Thus, the “pay ceiling” regulation weakens the

efficiency of tournament incentives in SOEs directly controlled by government bureaus.

Overall, the tournament theory applies to China’s listed firms, and a large CEO pay

disparity is beneficial to firm performance. CEO pay disparity can be used as an

effective corporate governance mechanism to build a skilled top management team and

enhance firm performance.

46

3.5 Appendix

Appendix A: Variable definitions

This appendix presents the definition of the variables used in this study

Variables Definition

ROA Net income divided by total assets in the year t.

ROE Net income divided by total equity in the year t.

CEO pay gap The difference between CEO pay and the median pay of all other

executives in the top management team.

CPG The natural logarithm of CEO pay gap.

CEO pay slice (CPS)

The fraction of aggregate compensation of the top five

executives that is captured by the CEO.

CPG75 A dummy variable equals 1 if the CPG is above the 75%

percentile CPG in the year t, and 0 otherwise.

CPS75 A dummy variable equals 1 if the CPS is above the 75%

percentile CPS in the year t, and 0 otherwise.

LnCEO age The natural logarithm of the CEO's age.

CEO duality A dummy variable equals 1 if CEO and Chairman of the board

are the same person, and 0 otherwise.

CEO Gender A dummy variable equals 1 if CEO is male, and 0 otherwise.

LnCEO Tenure

The natural logarithm of the number of years that the CEO has

served as CEO in the sample firm.

LnBoard size The natural logarithm of total number of directors.

Board independence Number of independent directors divided by number of

directors.

Firm size The natural logarithm of total assets.

Leverage The book value of debt divided by book value of total asset.

Largest shareholder Percentage of shares owned by the largest shareholder.

LnFirm age The natural logarithm of the number of years (plus one) since

incorporation.

47

3.6 Tables

Table 1: Summary statistics

This table reports the summary statistics of the variables employed in the analysis. The

sample comprises 20,760 observations (firm-years) from 2005 to 2017. The

descriptions of all variables are reported in Appendix A.

Variable Obs Mean SD P25 Median P75

Panel A: Firm performance

ROA (%) 20,760 4.37% 5.38% 1.64% 3.94% 6.86%

ROE (%) 20,760 7.40% 10.96% 3.49% 7.42% 11.68%

Panel B: Executive compensation

CEO pay 20,760 637,991 695,123 283,180 469,941 751,950

Median pay-other top executives 20,760 417,327 364,623 204,000 331,000 518,325

Top5 20,760 2,545,000 2,420,000 1,220,000 1,955,050 3,093,400

Panel C: CEO pay disparity

CEO pay gap 20,760 220,664 449,370 48,750 119,000 251,850

CPS (%) 20,760 24.89% 7.25% 21.74% 24.20% 27.86%

Panel D: CEO characteristics

CEO gender 20,760 94.56% 22.68% 1 1 1

CEO age 20,760 48.46 6.45 44 48 53

CEO duality 20,760 24.07% 42.75% 0 0 0

CEO tenure 20,760 3.795 2.97 2 3 5

Panel E: Control variables

Board size 20,760 8.91 1.79 8 9 9

Board independence (%) 20,760 36.90% 5.43% 33.33% 33.33% 40.00%

Leverage 20,760 0.44 0.22 0.27 0.44 0.60

LnFirm Size 20,760 21.94 1.29 21.03 21.77 22.65

Largest shareholder (%) 20,760 36.40% 15.30% 24.28% 34.52% 47.11%

Firm age 20,760 2.665 0.42 11 15 19

48

Table 2: Time trend

This table displays the time trend of CEO pay disparity, top executives’ compensation

and firm performance measures. Panel A and Panel B indicates the sub-sample of SOEs

and private firms, respectively. The descriptions of all variables are reported in

Appendix A.

Panel A: Full sample

Panel B: SOEs

Year CEO pay Median pay CEO pay gap Top4 CPS ROA ROE

2005 249,235 179,676 69,558 757,490 24.42% 2.26% 4.08%

2006 304,200 208,246 95,954 887,539 24.84% 3.51% 6.50%

2007 429,503 293,009 136,494 1,277,844 24.81% 4.54% 9.36%

2008 469,817 328,591 141,227 1,424,845 24.67% 3.01% 5.44%

2009 490,692 355,950 134,742 1,546,892 24.12% 3.70% 7.57%

2010 600,080 424,869 175,210 1,864,729 24.02% 4.64% 9.47%

2011 676,649 476,707 199,942 2,095,377 23.91% 4.31% 8.91%

2012 691,169 490,986 200,183 2,164,279 23.69% 3.44% 6.73%

2013 721,848 520,927 200,921 2,308,250 23.26% 3.20% 6.20%

2014 750,897 541,080 209,817 2,403,220 23.39% 2.87% 5.16%

2015 749,111 548,420 200,691 2,464,717 22.64% 2.24% 3.77%

2016 776,404 575,830 200,574 2,587,297 22.49% 3.11% 5.73%

2017 876,507 647,420 229,087 2,912,771 22.50% 3.72% 7.21%


2005 258,745 175,344 83,402 748,362 25.02% 2.27% 3.74%

2006 297,039 197,729 99,310 861,158 25.28% 3.64% 6.76%

2007 412,453 271,983 140,470 1,192,603 25.40% 4.86% 9.69%

2008 460,120 306,715 153,404 1,340,409 25.26% 3.74% 6.36%

2009 482,125 324,792 157,334 1,439,766 25.12% 4.83% 8.78%

2010 557,559 363,216 194,343 1,606,739 25.53% 5.62% 10.16%

2011 608,645 396,222 212,423 1,773,319 25.27% 5.30% 9.01%

2012 630,836 412,944 217,892 1,863,836 25.18% 4.32% 7.10%

2013 671,942 444,292 227,650 2,022,748 24.79% 4.09% 6.86%

2014 699,184 462,398 236,786 2,112,535 24.79% 4.02% 6.48%

2015 748,014 484,660 263,354 2,246,954 24.45% 3.63% 5.71%

2016 787,949 512,880 275,069 2,417,926 24.29% 4.37% 7.04%

2017 861,634 554,105 307,529 2,611,150 24.51% 4.93% 8.15%

49

Panel C: Private firms


2005 288,425 161,824 126,601 719,878 26.91% 2.28% 2.67%

2006 278,420 170,385 108,035 792,568 26.42% 3.98% 7.43%

2007 376,368 227,481 148,886 1,012,189 26.66% 5.56% 10.39%

2008 441,011 263,614 177,397 1,174,041 26.42% 5.17% 8.17%

2009 469,048 277,230 191,818 1,276,245 26.65% 6.56% 10.62%

2010 513,143 298,815 214,328 1,337,252 27.11% 6.65% 10.88%

2011 553,051 330,425 222,626 1,510,035 26.38% 6.11% 9.09%

2012 584,999 353,652 231,346 1,635,580 26.32% 4.99% 7.38%

2013 635,667 388,589 247,077 1,815,229 25.89% 4.73% 7.34%

2014 664,507 409,636 254,871 1,917,613 25.73% 4.79% 7.37%

2015 747,352 446,204 301,148 2,115,610 25.55% 4.47% 6.88%

2016 794,245 478,547 315,698 2,325,552 25.27% 5.05% 7.75%

2017 854,640 510,223 344,418 2,469,311 25.46% 5.49% 8.59%

50

Table 3: Correlation matrix

This table shows the correlations between variables employed in this study. The descriptions of all variables are reported in Appendix A.

1 2 3 4 5 6 7 8 9 10 11 12 13 14

1 ROA 1.000

2 ROE 0.796 1.000

3 CPG 0.126 0.127 1.000

4 CPS 0.064 0.045 0.642 1.000

5 CEO gender -0.024 -0.021 -0.045 -0.024 1.000

6 LnCEO age 0.002 0.002 0.085 0.040 0.017 1.000

7 CEO duality 0.081 0.029 0.063 0.099 0.025 0.165 1.000

8 LnCEO tenure -0.062 -0.023 0.134 0.127 0.018 0.201 0.021 1.000

9 Board size -0.015 0.017 0.010 -0.047 0.070 0.036 -0.194 0.056 1.000

10 Board independence -0.012 -0.009 -0.007 -0.024 -0.043 0.024 0.122 -0.015 -0.458 1.000

11 leverage -0.376 -0.088 0.006 -0.066 0.028 0.010 -0.177 0.098 0.157 -0.020 1.000

12 Firm size -0.053 0.075 0.161 -0.115 0.027 0.146 -0.177 0.145 0.220 0.060 0.425 1.000

13 LnFirm age -0.110 -0.051 0.098 -0.018 -0.021 0.127 -0.077 0.148 -0.020 -0.004 0.163 0.192 1.000

14 Lsharerholder 0.103 0.114 -0.052 -0.057 -0.008 0.030 -0.039 -0.111 0.011 0.040 0.047 0.208 -0.163 1.000

51

Table 4: CEO pay disparity and firm performance.

This table shows the estimates of the OLS regression model, controlling for industry

and year effects, to examine the influence of CEO pay disparity on firm performance.

The regression specification is as follows:

Firm performance = 𝛼 + 𝛽1CEO pay disparity + 𝛽2CEO gender + 𝛽3LnCEO age +

𝛽4CEO duality + 𝛽5LnCEO tenure + 𝛽6LnBoard size + 𝛽7Board independence +


The superscripts *, **, and *** indicate significance at the 90%, 95% and 99%

confidence levels, respectively.

Dependent variable

Model 1

ROA

Model 2

ROE

Model 3

ROA

Model 4

ROE

CPG 0.029*** 0.053***

(10.478) (8.033)

CPS 0.034*** 0.067***

(6.235) (5.120)

CEO gender -0.003* -0.008 -0.004* -0.008*

(-1.645) (-1.607) (-1.778) (-1.714)

LnCEO age -0.000 -0.004 0.001 -0.003

(-0.023) (-0.416) (0.147) (-0.297)

CEO duality 0.002 0.004 0.002 0.004

(1.392) (1.375) (1.376) (1.349)

LnCEO tenure -0.002*** -0.004*** -0.002*** -0.003***

(-4.743) (-2.947) (-4.495) (-2.825)

LnBoard size 0.001 -0.011 0.001 -0.010

(0.253) (-1.408) (0.428) (-1.272)

Board independence -0.013 -0.035 -0.013 -0.035

(-1.394) (-1.590) (-1.404) (-1.595)

Leverage -0.088*** -0.074*** -0.087*** -0.073***

(-32.320) (-11.363) (-32.214) (-11.314)

Firm size 0.002** 0.009*** 0.003*** 0.010***

(2.386) (4.840) (3.339) (5.585)

LnFirm age -0.012*** -0.015* -0.013*** -0.016**

(-3.358) (-1.762) (-3.676) (-1.993)

Lsharerholder 0.061*** 0.161*** 0.060*** 0.161***

(12.021) (13.368) (11.963) (13.325)

Constant -0.361*** -0.818*** 0.035 -0.094

(-7.857) (-7.455) (1.432) (-1.587)

Observations 20,760 20,760 20,760 20,760

Adjusted R-squared 0.456 0.250 0.454 0.248

Industry-Year FE Yes Yes Yes Yes

52

Table 5: Determinants of CEO pay disparity.

This table displays the estimates of the basic propensity score model, controlling for

industry and year effects.

CEO pay disparity = 𝛼 + 𝛽1CEO duality + 𝛽2LnCEO age + 𝛽3LnCEO tenure +

𝛽4LnBoard size + 𝛽5 Board independence + 𝛽6Leverage + 𝛽7Firm size + 𝛽8LnFirm age

+ 𝛽9Largest shareholder + 𝜀



Model 1 Model 2

Dependent variable CPG75 CPS75

CEO duality 0.241*** 0.295***

(5.550) (7.155)

LnCEO age 0.160 0.085

(1.106) (0.649)

LnCEO tenure 0.125*** 0.087***

(5.984) (4.416)

LnBoard size -0.025 -0.529***

(-0.223) (-5.178)

Board independence -0.693* -0.719**

(-1.873) (-2.177)

Leverage -0.752*** -0.259***

(-7.207) (-2.928)

Firm size 0.229*** -0.068***

(12.298) (-3.799)

LnFirm age 0.049 0.055

(0.859) (1.079)

Lshareholder -0.619*** -0.447***

(-4.607) (-3.562)

Constant -5.458*** 1.531**

(-7.109) (2.068)

Observations 20,487 20,701

Industry-Year FE Yes Yes

53

Table 6: CEO pay disparity and firm performance, PSM approach analysis.

Panel A reports t-test analysis of CEO pay disparity effects on firm performance. It

shows the different influence between the treatment group (CPG75/CPS75=1) and

control group (CPG75/CPS75=0) to ROA and ROE. Mean refers to the average firm

performance associated with the high or low CEO pay disparity. Difference is equal to

the mean of treatment minus the mean of control.

Panel B reports the results of propensity score matching approach analysis to address

selection issue. OLS regression model is employed to examine the effect of CEO pay

disparity on firm performance.






Panel A: t-test analysis of CEO pay disparity effects on firm performance

CPG75 Treatment

Mean

Control

Mean

Difference

t stat

ROA 0.0572 0.0414 0.0158*** 16.18

ROE 0.0994 0.0692 0.0301*** 16.41

CPS75 Treatment

Mean

Control

Mean

Difference

t stat

ROA 0.0486 0.0433 0.0053*** 4.92

ROE 0.0799 0.0696 0.0103*** 4.79

Panel B: CEO pay disparity and firm performance, PSM approach analysis

Dependent variable

Model 1

ROA

Model 2

ROE

Model 3

ROA

Model 4

ROE

CPG75 0.008*** 0.014***

(7.401) (5.596)

CPS75 0.003** 0.008***

(2.369) (2.654)

CEO duality -0.000 -0.000 0.001 0.002

(-0.174) (-0.109) (0.647) (0.593)

LnCEO age 0.004 0.004 0.010* 0.009

(0.747) (0.385) (1.650) (0.698)

LnCEO tenure -0.002*** -0.004*** -0.002*** -0.006***

(-3.562) (-2.739) (-2.858) (-3.035)

LnBoard size 0.004 -0.016 0.002 -0.008

(0.939) (-1.584) (0.332) (-0.651)

Board independence 0.009 -0.014 -0.023 -0.029

(0.721) (-0.505) (-1.527) (-0.836)

54

Leverage -0.083*** -0.056*** -0.089*** -0.078***

(-18.887) (-5.621) (-21.151) (-7.995)

Firm size 0.004*** 0.011*** 0.001 0.011***

(3.450) (4.361) (1.099) (3.841)

LnFirm age -0.000 0.015 -0.014** -0.026**

(-0.041) (1.345) (-2.424) (-1.986)

Lshareholder 0.041*** 0.107*** 0.068*** 0.143***

(5.521) (6.397) (8.286) (7.574)

Constant -0.051 -0.216*** 0.037 -0.109

(-1.425) (-2.697) (0.955) (-1.223)

Observations 10,374 10,374 10,370 10,370



55

Table 7: CEO pay disparity and firm performance: SOEs and private firms

This table shows the results of subsample analysis, controlling for industry and year

effects, to examine the influence of CEO pay disparity on firm performance in SEOs

and private firms, respectively.






Panel A SOEs subsample

(1)

ROA

(2)

ROE

(1)

ROA

(2)

ROE

CPG 0.020*** 0.046***

(4.894) (4.083)

CPS 0.016* 0.045**

(1.882) (1.996)

CEO gender -0.003 -0.004 -0.003 -0.005

(-0.964) (-0.507) (-1.086) (-0.610)

LnCEO age 0.008 0.011 0.008 0.012

(1.420) (0.787) (1.502) (0.848)

CEO duality -0.001 0.001 -0.000 0.002

(-0.297) (0.267) (-0.230) (0.315)

LnCEO tenure -0.000 -0.001 -0.000 -0.000

(-0.552) (-0.349) (-0.036) (-0.033)

LnBoard size -0.009** -0.040*** -0.008** -0.040***

(-2.036) (-3.507) (-1.991) (-3.464)

Board independence -0.026** -0.090*** -0.027** -0.092***

(-2.197) (-2.807) (-2.269) (-2.858)

Leverage -0.118*** -0.107*** -0.118*** -0.108***

(-29.280) (-9.860) (-29.347) (-9.925)

Firm size 0.006*** 0.011*** 0.006*** 0.012***

(5.152) (3.533) (5.519) (3.844)

LnFirm age -0.011** -0.015 -0.013** -0.018

(-2.188) (-1.080) (-2.471) (-1.301)

Lsharerholder 0.022*** 0.062*** 0.022*** 0.061***

(3.132) (3.216) (3.060) (3.164)

Constant -0.314*** -0.701*** -0.027 -0.056

(-4.484) (-3.699) (-0.733) (-0.562)

Observations 9,615 9,615 9,615 9,615



56

Panel B Private firms subsample

(1) (2) (1) (2)

ROA ROE ROA ROE

CPG 0.029*** 0.045***

(7.673) (5.835)

CPS 0.034*** 0.057***

(4.570) (3.770)

CEO gender 0.001 0.003 0.001 0.003

(0.450) (0.575) (0.404) (0.528)

LnCEO age -0.005 -0.018* -0.005 -0.017*

(-1.086) (-1.756) (-0.936) (-1.654)

CEO duality 0.003* 0.003 0.002 0.003

(1.652) (1.043) (1.586) (0.982)

LnCEO tenure -0.004*** -0.006*** -0.004*** -0.006***

(-5.167) (-3.624) (-5.221) (-3.700)

LnBoard size 0.012** 0.027*** 0.013*** 0.028***

(2.503) (2.653) (2.719) (2.815)

Board independence 0.008 0.035 0.009 0.037

(0.525) (1.149) (0.630) (1.226)

Leverage -0.055*** -0.039*** -0.055*** -0.038***

(-14.047) (-4.713) (-13.869) (-4.590)

Firm size -0.000 0.008*** 0.000 0.009***

(-0.295) (3.435) (0.279) (3.881)

LnFirm age -0.005 -0.006 -0.006 -0.007

(-1.064) (-0.579) (-1.190) (-0.665)

Lsharerholder 0.093*** 0.221*** 0.094*** 0.222***

(12.138) (13.922) (12.182) (13.953)

Constant -0.363*** -0.795*** 0.028 -0.179**

(-5.776) (-6.102) (0.798) (-2.450)

Observations 11,145 11,145 11,145 11,145



57

Table 8: CEO pay disparity and firm performance: Pre and Post “pay ceiling”

regulation period


effects, to examine the influence of the “pay ceiling” regulation on the relationship

between CEO pay disparity and firm performance in SEOs, private firms and SOEs

directly controlled by government bureaus, respectively.






Panel A

SOEs subsample

Pre

period

Post

period

Pre

period

Post

period

05-14 15-17 05-14 15-17

ROA ROA ROA ROA

CPG 0.023*** 0.017**

(4.186) (2.101)

CPS 0.011 0.022

(1.138) (1.225)

CEO gender -0.005 -0.001 -0.006 -0.001

(-1.411) (-0.133) (-1.469) (-0.162)

LnCEO age 0.003 -0.042** 0.003 -0.041**

(0.454) (-2.414) (0.459) (-2.372)

CEO duality -0.000 0.006 0.000 0.006

(-0.070) (1.419) (0.007) (1.413)

LnCEO tenure 0.000 0.001 0.001 0.002

(0.459) (0.828) (1.034) (0.918)

LnBoard size -0.011** 0.021 -0.010** 0.021

(-2.091) (1.484) (-2.041) (1.475)

Board independence -0.024* 0.012 -0.025* 0.010

(-1.700) (0.332) (-1.741) (0.275)

Leverage -0.136*** -0.163*** -0.136*** -0.162***

(-26.861) (-10.098) (-26.903) (-10.066)

Firm size 0.008*** 0.027*** 0.008*** 0.027***

(5.060) (5.488) (5.265) (5.511)

LnFirm age -0.012* -0.017 -0.014** -0.017

(-1.853) (-0.311) (-2.161) (-0.311)

Lsharerholder 0.021** 0.018 0.021** 0.016

(2.407) (0.631) (2.395) (0.566)

Constant -0.358*** -0.590** -0.028 -0.355*

(-3.894) (-2.486) (-0.607) (-1.689)

Observations 7,156 2,459 7,156 2,459



58

Panel B

Private firms subsample

Pre

period

Post

period

Pre

period

Post

period

05-14 15-17 05-14 15-17

ROA ROA ROA ROA

CPG 0.031*** 0.026***

(4.617) (4.967)

CPS 0.018* 0.059***

(1.662) (4.711)

CEO gender -0.001 -0.002 -0.001 -0.002

(-0.236) (-0.387) (-0.193) (-0.352)

LnCEO age 0.000 0.004 0.001 0.002

(0.041) (0.362) (0.151) (0.213)

CEO duality -0.002 0.001 -0.002 0.001

(-0.948) (0.265) (-0.853) (0.211)

LnCEO tenure -0.004*** -0.004** -0.004*** -0.004***

(-3.690) (-2.511) (-3.560) (-2.632)

LnBoard size 0.007 0.013 0.009 0.013

(1.132) (1.128) (1.384) (1.138)

Board independence -0.007 0.048 -0.004 0.047

(-0.371) (1.467) (-0.211) (1.456)

Leverage -0.042*** -0.080*** -0.042*** -0.081***

(-7.578) (-8.506) (-7.553) (-8.552)

Firm size -0.009*** 0.004 -0.008*** 0.005*

(-5.063) (1.563) (-4.643) (1.872)

LnFirm age -0.011 -0.056 -0.012* -0.056

(-1.611) (-1.615) (-1.794) (-1.611)

Lsharerholder 0.127*** 0.061*** 0.128*** 0.062***

(10.639) (2.952) (10.637) (2.991)

Constant -0.216** -0.306** 0.209*** 0.045

(-2.028) (-2.133) (4.019) (0.360)

Observations 6,532 4,613 6,532 4,613



59

Panel C:

Directly controlled SOEs

Full

sample

Pre

period

Post

period

05-17 05-14 15-17

ROA ROA ROA

CPG 0.020*** 0.021*** 0.012

(4.379) (3.487) (1.429)

CEO gender -0.005 -0.008* -0.001

(-1.527) (-1.830) (-0.120)

LnCEO age 0.006 0.001 -0.045**

(1.075) (0.206) (-2.418)

CEO duality -0.001 -0.002 0.005

(-0.603) (-0.637) (1.076)

LnCEO tenure -0.001 0.000 0.002

(-0.978) (0.101) (1.202)

LnBoard size -0.007 -0.009* 0.036**

(-1.557) (-1.650) (2.271)

Board independence -0.033** -0.037** 0.031

(-2.554) (-2.368) (0.779)

Leverage -0.133*** -0.146*** -0.166***

(-29.387) (-26.289) (-9.512)

Firm size 0.006*** 0.007*** 0.029***

(4.787) (4.186) (5.511)

LnFirm age -0.017*** -0.017** -0.001

(-2.728) (-2.216) (-0.013)

Lsharerholder 0.029*** 0.029*** -0.006

(3.577) (2.900) (-0.202)

Constant -0.279*** -0.286*** -0.654**

(-3.661) (-2.841) (-2.490)

Observations 8,160 5,980 2,180

Adjusted R-squared 0.494 0.546 0.498

Industry-Year FE Yes Yes Yes

60

Table 9: CEO pay disparity and firm performance: does industry concentration

matter


effects, to examine whether the positive relationship between CEO pay disparity and

firm performance is subject to industry concentration.






Panel A: SOEs

Highly competitive

industry

Medium-concentrated

industry

Highly concentrated

industry

ROA ROA ROA

CPG 0.014* 0.022*** 0.015

(1.830) (3.884) (1.132)

CEO gender 0.012** -0.010** -0.003

(2.234) (-2.455) (-0.318)

LnCEO age 0.017* 0.018** -0.029

(1.746) (2.339) (-1.558)

CEO duality 0.006* -0.001 -0.002

(1.767) (-0.471) (-0.384)

LnCEO tenure 0.001 -0.000 -0.002

(1.006) (-0.417) (-1.115)

LnBoard size -0.009 -0.015** 0.017

(-1.129) (-2.573) (0.989)

Board independence -0.009 -0.012 -0.094**

(-0.465) (-0.694) (-2.155)

Leverage -0.119*** -0.106*** -0.185***

(-14.758) (-18.818) (-13.607)

Firm size 0.007*** 0.005*** 0.007

(3.139) (3.073) (1.603)

LnFirm age -0.004 -0.020** -0.039*

(-0.513) (-2.082) (-1.943)

Lsharerholder 0.035** 0.008 0.026

(2.470) (0.852) (0.967)

Constant -0.342*** -0.309*** -0.027

(-2.612) (-3.191) (-0.117)




61

Panel B: Private firms

Highly competitive

industry

Medium-concentrated

industry

Highly concentrated

industry

ROA ROA ROA

CPG 0.032*** 0.022*** 0.028***

(3.268) (4.441) (3.745)

CEO gender -0.007 0.002 0.004

(-0.848) (0.549) (0.654)

LnCEO age -0.014 0.001 -0.017

(-1.067) (0.168) (-1.524)

CEO duality 0.001 0.000 0.009***

(0.145) (0.049) (2.605)

LnCEO tenure -0.004* -0.003*** -0.005***

(-1.841) (-3.248) (-2.924)

LnBoard size 0.018 0.022*** 0.003

(1.451) (3.350) (0.254)

Board independence 0.058 0.016 -0.022

(1.497) (0.845) (-0.637)

Leverage -0.029*** -0.068*** -0.050***

(-2.678) (-11.647) (-5.375)

Firm size -0.015*** 0.003** -0.003

(-5.049) (2.015) (-0.863)

LnFirm age 0.008 -0.004 0.023*

(0.637) (-0.617) (1.914)

Lsharerholder 0.144*** 0.078*** 0.086***

(5.842) (7.490) (4.790)

Constant -0.144 -0.402*** -0.300**

(-0.842) (-4.713) (-2.219)




62


age matter



firm performance is subject to the age of non-CEO executives.






Average age of non-

CEO executives:

<=41 41<age<43 43<age<46 46<age<51 49<age<51 >=51

ROA ROA ROA ROA ROA ROA

CPG 0.007 0.038*** 0.035*** 0.026*** 0.030*** 0.011

(0.510) (3.389) (5.596) (4.068) (3.480) (1.340)

CEO gender -0.023** 0.010 0.004 -0.002 -0.018* 0.003

(-2.329) (1.296) (0.921) (-0.380) (-1.954) (0.425)

LnCEO age -0.027* -0.011 -0.009 -0.014 0.004 0.001

(-1.805) (-0.765) (-0.976) (-1.585) (0.288) (0.048)

CEO duality -0.001 0.001 0.000 0.001 0.006 0.010**

(-0.229) (0.131) (0.055) (0.363) (1.572) (2.343)

LnCEO tenure -0.006** 0.001 -0.004*** -0.003** -0.003** -0.004**

(-2.404) (0.381) (-3.223) (-2.264) (-2.276) (-2.387)

LnBoard size 0.016 -0.028** -0.001 -0.014* 0.036*** 0.003

(1.089) (-2.470) (-0.142) (-1.760) (3.300) (0.299)

Board independence -0.068 -0.037 -0.028 -0.018 0.039 0.021

(-1.542) (-1.066) (-1.284) (-0.863) (1.233) (0.679)

Leverage -0.040*** -0.096*** -0.077*** -0.089*** -0.150*** -0.073***

(-3.256) (-9.637) (-10.759) (-13.601) (-14.381) (-6.151)

Firm size -0.016*** 0.002 0.007*** 0.007*** 0.009*** 0.003

(-4.240) (0.545) (3.392) (3.733) (3.127) (0.983)

LnFirm age -0.031* -0.005 -0.024** -0.012 -0.013 -0.014

(-1.904) (-0.317) (-2.241) (-1.240) (-0.869) (-0.839)

Lsharerholder 0.139*** 0.099*** 0.066*** 0.057*** 0.076*** 0.034*

(5.642) (4.475) (5.189) (4.676) (4.414) (1.736)

Constant 0.480** -0.433** -0.500*** -0.353*** -0.625*** -0.153

(2.141) (-2.308) (-4.464) (-3.312) (-3.967) (-0.949)

Observations 2,240 2,988 4,938 5,354 3,152 2,088

Adjusted R-squared 0.454 0.522 0.568 0.486 0.562 0.592

Industry-Year FE Yes Yes Yes Yes Yes Yes

63


gender matter



firm performance is subject to the gender of non-CEO executives.






Panel A:

Female ratio within

non-CEO executives

<=10%

>10% and <25% >25% and <50% >=50%

ROA ROA ROA ROA

CPG 0.022*** 0.034*** 0.039*** 0.015

(4.977) (6.783) (4.143) (0.992)

CEO gender -0.010** 0.002 0.001 -0.011

(-2.480) (0.516) (0.219) (-1.165)

LnCEO age 0.000 -0.005 0.030** 0.030

(0.049) (-0.875) (2.287) (1.362)

CEO duality 0.002 0.002 0.000 0.010

(1.075) (0.779) (0.008) (1.438)

LnCEO tenure -0.002*** -0.001 -0.003* -0.010***

(-2.728) (-1.455) (-1.778) (-3.701)

LnBoard size 0.005 0.004 0.030*** 0.006

(1.012) (0.624) (2.583) (0.366)

Board independence 0.008 -0.023 -0.002 -0.010

(0.538) (-1.340) (-0.051) (-0.215)

Leverage -0.109*** -0.086*** -0.137*** -0.006

(-21.866) (-17.047) (-12.921) (-0.425)

Firm size 0.004*** 0.002 0.004 -0.010**

(3.375) (1.111) (1.243) (-2.120)

LnFirm age -0.013** -0.006 0.024* -0.052**

(-2.127) (-1.032) (1.759) (-2.242)

Lsharerholder 0.050*** 0.068*** 0.083*** 0.045

(5.916) (7.385) (3.970) (1.393)

Constant -0.319*** -0.442*** -0.833*** 0.091

(-4.210) (-5.299) (-5.032) (0.363)

Observations 8,705 8,009 2,666 1,380



64

4. Essay two

Managerial pay disparity and earnings management: Evidence from

China

4.1 Introduction

It is an important research question whether pay disparity among the top management

team affects firm behaviours. Prior studies present inconclusive evidence regarding the

effects of managerial pay disparity on firm value and performance, but very few studies

focus on the impact of managerial pay disparity on firm earnings management activities.

This essay investigates the relationship between managerial pay disparity and earnings

management. More specifically, I examine whether and how the pay gap between the

CEO and other top executives influences corporate accrual-based earnings

manipulation.

Senior corporate management groups are responsible for firms’ day-to-day operations

and profitability. Besides, the nature of executive work requires a high degree of task

interdependence (Siegel & Hambrick, 2005). Thus, executive compensation schemes

are expected to influence the functioning of top management teams. In particular, the

managerial pay disparity is the key to the corporate remuneration structure that plays

an important role in the inner workings of the top management team (Bebchuk et al.,

2011).

The focus of this essay is to examine how pay disparity between the CEO and other top

executives affects firm accrual-based earnings management. Accounting information is

a critical element in the Chinese regulators’ administrative governance of listed firms

(Liu & Lu, 2007). For example, regulators will mark the companies as potential

delisting companies if they report net losses over three sequential years (Chen & Yuan,

2004; Liu & Lu, 2007). According to the tournament theory, a large managerial pay

disparity provides non-CEO executives with great tournament incentives to pursue the

promotion to be the next CEO (Lazear & Rosen, 1981). It is argued that a large

tournament prize for senior managers leads to extremely aggressive and competitive

behaviours (Siegel & Hambrick, 2005). Therefore, a large managerial pay disparity

may provide non-CEO executives with tournament incentives to engage in earnings

management.

65

Managerial pay disparity is addressed through two approaches in this study. The pay

gap between the CEO and other top executives is utilised as the first measure following

existing studies (Kale et al., 2009; Kini & Williams, 2012; Park, 2017). More

importantly, the pay gap between the CEO and the CFO is the other focus to explore

the impact of pay disparity on accrual-based earnings management. Jiang et al. (2010)

document that CEOs or CFOs are more likely to have sophisticated accounting and

finance expertise that is required for accrual-based earnings management. Hence, the

other non-CEO executives could have less capability to engage in accrual-based

earnings management than CFOs. CEOs are responsible for the strategic operations of

the firm, while CFOs have the primary responsibility in overseeing firms overall

financial reporting (Geiger & North, 2006). In this situation, the influence of CFOs over

the financial reporting process could be more important than that of other non-CEO

executives. Therefore, the pay gap between the CEO and the CFO is expected to play a

more important role in earnings management activities.

This study investigates the relationship between managerial pay disparity and accrual-

based earnings management in Chinese listed firms. China provides an ideal situation

to examine the impact of tournament effects on firms’ earnings management. In

Chinese markets, where accounting information is essential for regulatory controls,

corporate governance system portends to be inefficient and investor protection is weak.

Literature shows that earnings management that could harm shareholders’ benefits is

common in China (Firth et al., 2006; Liu & Lu, 2007).

My results show that the pay gap between the CEO and the CFO is negatively

associated with accrual-based earnings management. This finding indicates that a large

managerial pay gap provides CFOs tournament incentives that mitigate the accrual-

based earnings manipulation. CFOs need to consider and balance the benefits and costs

from engaging in accrual-based earnings management since they are ultimately

responsible for the quality of financial reporting. Feng et al. (2011) and Mian (2001)

document that CFOs undertake greater legal costs and bear potential higher loss of

reputation and wealth than that of CEOs in manipulating earnings. As a result, CFOs

appear to obtain fewer benefits and suffer greater loss from accounting manipulations

relative to CEOs. Further, a CFO’s career and promotion opportunities will be greatly

harmed if the company is found to have committed an accounting violation. By

66

considering that a large tournament prize incentivizes CFOs to work hard for the higher

rank in the top management team, CFOs could be more cautious and conservative to

engage in accrual-based earnings management.

In addition, the pay gap between the CEO and other top executives is not significantly

associated with accrual-based earnings management. It is consistent with the notion that

non-CEO top executives (exclude CFO) face higher costs of engaging in accrual-based

earnings management because they are less likely to have sophisticated accounting and

finance expertise (Baker, Lopez, Reitenga, & Ruch, 2019; Jiang et al., 2010). Overall,

a large pay gap between the CEO and the CFO is a useful governance mechanism that

can mitigate the accrual-based earnings management in China.


Earnings management is the use of accounting techniques to produce financial reports

that present an overly positive view of a company's business activities and financial

position to obtain some private gain (Schipper, 1989). In China, accounting information

is essential for regulatory controls. For example, the minimum ROE hurdles must be

met to gain approval for rights issues, and companies will be marked as potential

delisting firms if they report net losses over three sequential years. High ownership

concentration and state ownership are the main sources of agency conflicts in listed

firms, thus, controlling shareholders may manipulate earnings to fulfil certain goals

(Liu & Lu, 2007). Given the fact that the corporate governance system is weak and the

protection for investors or business transactions is poor, earnings management activities

are rife in Chinese markets (Liu & Lu, 2007). Firms should employ many incentive

mechanisms to ensure the consistency of managers’ interests and shareholders’ interests,

thereby, preventing managers manipulating reported earnings.

Tournament theory indicates that a large managerial pay gap provides other top

executives with a large tournament prize to incentivize hard work for advancement to

the CEO position (Kale et al., 2009; Lazear & Rosen, 1981). Furthermore, Siegel &

Hambrick (2005) suggest that a large tournament prize leads to extremely aggressive

and competitive behaviours. Hence, the promotion-based tournament incentives for

non-CEO executives could play an important role in earnings management. For

example, Healy (1985) finds that executives manage accruals to maximize bonus

payments. Besides, senior managers have financial incentives to increase their

67

performance-based and equity-based compensation by engaging in earnings

management (Bergstresser & Philippon, 2006; Jiang et al., 2010). If the pay gap

between the CEO and other top executives is large, non-CEO executives could be

motivated to engage in earnings manipulations for higher ranks and more salaries. Park

(2017) examines how managerial pay disparity affects firm earnings management

activities in the US-listed firms from 1994 to 2013. It is found that pay disparity

between the CEO and other top executives is positively associated with earnings

management. This positive relation is driven by short-term compensation rather than

long-term compensation. Overall, a large tournament prize motivates non-CEO

executives to compete extremely for more chances of becoming the next CEO.

Therefore, I have the following hypothesis:

H1: Pay disparity between the CEO and other top executives is positively

associated with accrual-based earnings management.

Accrual earnings management requires senior executives with accounting and finance

expertise, while this is more likely to be limited to CEOs and CFOs (Jiang et al., 2010).

Under this circumstance, the other executives could face higher costs in manipulating

accrual earnings activities (Baker et al., 2019). Besides, most top executives carry out

and oversee firms’ daily operational decisions, while CFOs have the ultimate

responsibility in overseeing firms’ overall financial reporting (Geiger & North, 2006).

The individual influences of CFOs over the financial reporting process are more

essential than that of the other senior executives (Feng et al., 2011; Jiang et al., 2010).

Consequently, most top executives could prefer to play roles in real earnings

management rather than accrual earnings management. I propose the following

hypothesis:

H2: Pay disparity between the CEO and other top executives is not associated with

accrual-based earnings management.

Given the fact that CFOs are primarily responsible for overseeing the quality of firms’

financial reporting, the CFOs’ incentives could play important roles in accrual earning

management. It is argued that CFOs in manipulation firms bear greater litigation risks

and undertake higher loss of reputation and wealth than do CEOs (Feng et al., 2011;

Mian, 2001). In this situation, CFOs appear to obtain fewer benefits and suffer greater

losses from accounting manipulations (Baker et al., 2019). According to the survey

68

evidence of Graham, Harvey, & Rajgopal (2005), CFOs prefer to engage in real

earnings management rather than accrual earning management to meet the earnings

goals. A large pay disparity between the CEO and the CFO provides CFOs with large

tournament incentives, thus, CFOs could be more cautious and conservative to engage

in accrual earnings management for the higher rank and salaries. I propose the

following hypothesis:

H3: Pay disparity between the CEO and the CFO is negatively associated with

accrual-based earnings management.

4.3 Sample and variable construction

4.3.1 Data

The initial sample of this study includes all Chinese companies listed in A-share

markets in the Shanghai and Shenzhen Stock Exchanges from 2005 to 2017 (the data

will be updated to 2018 and later). All data are collected from the China Listed Firms

Research Database of China Stock Market and Accounting Research (CSMAR). The

starting year of our sample is 2005 because the listed firms started to disclose the

compensation of top executives (including Chairman of the Board, CEO, and other top

executives) since 2005. Only the aggregate amount of payment to the top three

executives were disclosed in annual reports before 2005.

Following the prior literature, financial firms and special treatment (ST) firms are

excluded because of their unique accounting standards. We also remove observations

with missing information and delete the top and bottom percentile of observations. The

final sample includes 2,507 firms that consistent of 17,849 firm-year observations.

4.3.2 Variable construction

4.3.2.1 Measuring CEO pay disparity

I follow Kale et al. (2009) to measure the pay gap between the CEO and other top

executives. The first measure is CEOPG, which is defined as the natural logarithm of

the difference between CEO pay and the median pay of all other executives in the top

management team. The second measure is the CFOPG, which is defined as the natural

logarithm of the difference between CEO pay and CFO pay.

69

CEOPG = Ln (Total compensation of CEO - Median of total compensation of other

executives in the firm-year).

CFOPG = Ln (Total compensation of CEO - Total compensation of CFO in the firm-

year).

An executive's total compensation is the sum of salary, bonuses and other cash

compensation. This compensation does not include long-term incentives such as stock

options and restricted stocks, because these are rarely exercised in China.

4.3.2.2 Measuring accrual-based earning management

The Jones Model:

Following Jones (1991), I estimate the following cross-sectional models within each

industry and year.

𝑇𝐴𝑖,𝑡

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1= 𝛽1

1

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1+ 𝛽2

∆𝑅𝐸𝑉𝑖,𝑡


𝑃𝑃𝐸𝑖,𝑡

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1+ 𝜀𝑖,𝑡 (1)

where i indexes firms and t indexes years. ASSETt−1 is total assets at the end of year t−1;

ΔREVt is the change in sales revenue from year t−1 to t; and PPEt is the gross value of

property, plant, and equipment at the end of year t. The composition of total accruals

(TAi,t) is as follows: TAi,t = [ΔCurrent Assetsi,t – ΔCashi,t] – [ΔCurrent Libilitiesi,t] –

Depreciation and Amortization Expensesi,t. The change (Δ) is computed between time

t and time t-1. It is required at least 10 observations to perform each cross-sectional

estimation.

Then, the Jones Model for nondiscretionary accruals is:

𝑁𝐷𝐴𝑖,𝑡 = 𝛽11





𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1 (2)

Finally, firm-year-specific discretionary accruals are calculated as:

𝐷𝐴𝑖,𝑡 =𝑇𝐴𝑖,𝑡

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1− 𝑁𝐷𝐴𝑖,𝑡 (3)

The Modified Jones Model:

My second proxy for earnings management is the discretionary accruals measure of

Dechow, Sloan, & Sweeney (1995). The modification is designed to eliminate the

conjectured tendency of the Jones Model to measure discretion-nondiscretionary

70

accruals with error when discretion is exercised over revenues. To construct this

measure, I first estimate the following model within each industry and year.

𝑇𝐴𝑖,𝑡

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1= 𝛽1

1





𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1+ 𝜀𝑖,𝑡 (4)

where i indexes firms and t indexes years. ASSETt−1 is total assets at the end of year t−1;

ΔREVt is the change in sales revenue from year t−1 to t; and PPEt is the gross value of

property, plant, and equipment at the end of year t. The composition of total accruals

(TAi,t) is as follows: TAi,t = [ΔCurrent Assetsi,t – ΔCashi,t] – [ΔCurrent Libilitiesi,t] –

Depreciation and Amortization Expensesi,t. The change (Δ) is computed between time

t and time t-1. It is required at least 10 observations to perform each cross-sectional

estimation.

Next, I use the following model and the estimated coefficients from equation (4) to

compute the nondiscretionary accruals (NDAi,t):

𝑁𝐷𝐴𝑖,𝑡 = 𝛽11


(∆𝑅𝐸𝑉𝑖,𝑡−∆𝐴𝑅𝑖,𝑡)



𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1 (5)

Following Dechow et al. (1995), the change in accounts receivable is subtracted from

the change in sales revenue as credit sales might also provide a potential opportunity

for accounting distortion.

Finally, the firm-year-specific discretionary accruals are calculated as

𝐷𝐴𝑖,𝑡 =𝑇𝐴𝑖,𝑡

𝐴𝑆𝑆𝐸𝑇𝑖,𝑡−1− 𝑁𝐷𝐴𝑖,𝑡 (6)

4.3.2.3 Control variables

I include the characteristics of CEOs and CFOs (e.g. age, gender and tenure), firm size,

board size, board independence, leverage, largest shareholder ownership, firm age and

ROA as control variables. Appendix A provides definitions for all variables.

4.3.3 Descriptive Statistics and correlation matrix

Table 1 provides the basic summary statistics of the variables employed in this study.

The discretionary accruals generated from Jones Model and Modified Jones Model are

similar, shown as 0.0066 and 0.0074, respectively. The mean CEO compensation is

607,484 RMB that is significantly greater than the mean CFO compensation and the

71

average median-compensation of non-CEO executives. The mean pay gap between the

CEO and non-CEO executives is 209,664 RMB, and the mean pay gap between the

CEO and the CFO is 217,647 RMB. In addition, 94.61% of CEOs are male, while 70.67%

of CFOs are male. The average proportion of independent directors is 36.81%, which

satisfies the requirements of the China Securities Regulatory Commission (CSRS) that

independent directors must account for at least one-third of the total numbers on boards

for all listed firms.

Insert Table 1 here

Table 2 reports the time trend of managerial pay disparity, top executives’

compensations and accrual-based earnings management measures included in this

study. Both the executives’ compensations and managerial pay gaps have a significant

increase from 2005 to 2017.

Insert Table 2 here

Table 3 reports the correlation matrix between the variables. The correlation

coefficients do not indicate any serious multicollinearity problems.

Insert Table 3 here

4.3.4 Empirical analysis

4.3.4.1 Managerial pay disparity and accrual-based earnings management

I conduct the following regression to investigate the influence of managerial pay

disparity on accrual-based earnings management. Table 4 contains the baseline

regression results after controlling for industry and year effects. Accrual-based earnings

management is measured by both discretionary accruals (DA1) and modified

discretionary accruals (DA2). Managerial pay disparity is measured by CFOPG and

CEOPG. CFOPG is employed in Panel A and CEOPG is used in Panel B.

Accrual-based earning management = 𝛼 + 𝛽1CFOPG/CEOPG + 𝛽2CEO gender +

𝛽3LnCEO age + 𝛽4CEO duality+ 𝛽5CEO tenure + 𝛽6CFO gender + 𝛽7LnCFO age

+𝛽8CFO director + 𝛽9LnCFO tenure + 𝛽10LnBoard size + 𝛽11Board independence +

𝛽12Leverage + 𝛽13Firm size + 𝛽14LnFirm age + 𝛽15Largest shareholder + 𝛽16ROA+ 𝜀

(7)

72

The results of Models 1 and 2 in Panel A show that the coefficients on CFOPG are both

-0.0297 and they are significant at the 5% level. It indicates that the pay gap between

the CEO and the CFO is negatively associated with accrual-based earnings management.

CFOs are less likely to engage in earnings manipulations in firms with a large pay gap

between the CEO and the CFO. As a large tournament prize induces CFOs to seek

higher ranks and more salaries, they could be more cautious and conservative in

managing accruals. This could be due to the reason that CFOs appear to obtain fewer

benefits and suffer greater losses of wealth and reputation from accounting

manipulations (Feng et al., 2011). A CFO’s career and promotion opportunities will be

greatly damaged if the company is found to have committed an accounting fraud. This

result is consistent with Hypothesis 3 that a large pay gap between the CEO and the

CFO can mitigate the accrual-based earnings management.

Models 1 and 2 in Panel B document that CEOPG is insignificantly associated with

accrual-based earnings management, which is in line with Hypothesis 2. It indicates

that the pay gap between CEO and other top executives does not play a role in

mitigating earnings manipulation. Most non-CEO top executives are less capacity to

influence earnings manipulation compared with CFOs. Non-CEO executives may have

greater influence on real earnings management that is more relative to their job because

they oversee firms’ daily operational decisions.

Overall, we have evidence that the large pay disparity between the CEO and the CFO

serves as a governance mechanism to mitigate the accrual-basing earnings management.

Insert Table 4 here

4.4 Future analysis

This section lists the future tests which are planned but not done yet.

1. Investigate the relation between managerial pay disparity and real earnings

management.

2. PSM test. Given the importance of endogeneity concerns, it is necessary to conduct

the propensity score matching sample test.

3. Discover the different influence of CEOs and CFOs on earnings management.

4. Other robustness checks.

73

4.5 Appendix

Appendix A: Variable definitions

This appendix presents the definition of the variables used in this study

Variables Definition

DA1 The residual of Jones model.

DA2 The residual of modified Jones model.

CFO pay gap The difference between the CEO pay and the CFO pay.

CFOPG The natural logarithm of CFO pay gap.

CEO pay gap The difference between the CEO pay and the median pay of all

other executives in the top management team.

CEOPG The natural logarithm of CEO pay gap.

LnCEO age The natural logarithm of the CEO's age.

CEO duality A dummy variable equals 1 if CEO and Chairman of the board

are the same person, and 0 otherwise.

CEO Gender A dummy variable equals 1 if CEO is male, and 0 otherwise.

LnCEO Tenure

The natural logarithm of the number of years that the CEO has

served as CEO in the sample firm.

LnCFO age The natural logarithm of the CFO's age.

CFO director A dummy variable equals 1 if CFO also hold the position of

board of director, and 0 otherwise.

CFO Gender A dummy variable equals 1 if CFO is male, and 0 otherwise.

LnCFO Tenure

The natural logarithm of the number of years that the CFO has

served as CFO in the sample firm.

LnBoard size The natural logarithm of total number of directors.

Board independence Number of independent directors divided by number of

directors.

Firm size The natural logarithm of total assets.

Leverage The book value of debt divided by book value of total asset.

Largest shareholder Percentage of shares owned by the largest shareholder.

LnFirm age The natural logarithm of the number of years (plus one) since

incorporation.

ROA Net income divided by total assets in the year t.

74

4.6 Tables

Table 1: Summary statistics

This table reports the summary statistics of the variables employed in the analysis. The

sample comprises 17,849 firm-years observations from 2005 to 2017. The descriptions

of all variables are reported in Appendix A.

Variable Obs Mean SD P25 Median P75

Panel A: Accrual EM

DA1 17,849 0.0066 0.1278 -0.0536 0.0048 0.0644

DA2 17,849 0.0074 0.1284 -0.0530 0.0055 0.0655

Panel B: Executive compensation

CEO pay 17,849 607,484 636,778 260,000 449,600 729,400

CFO pay 17,849 389,837 382,619 175,000 299,000 485,000

Median-other top executives 17,849 398,257 354,584 190,000 311,500 498,550

Panel C: Executive pay gap

CEO pay gap 17,849 209,227 401,930 46,300 114,400 248,350

CFO pay gap 17,849 217,647 416,221 46,000 120,000 266,400

Panel D: Executive characteristics

CEO gender 17,849 94.61% 22.58% 1 1 1

CFO gender 17,849 70.67% 45.53% 0 1 1

CEO age 17,849 48.19 6.44 44 48 52

CFO age 17,849 44.84 6.49 40 44 49

CEO duality 17,849 21.20% 40.87% 0 0 0

CFO director 17,849 25.37% 43.51% 0 1 1

CEO tenure 17,849 4.02 2.92 2 3 5

CFO tenure 17,849 4.22 3.04 2 3 6

Panel E: Control variables

Board size 17,849 8.74 1.22 8 9 9

Board independence 17,849 36.81% 5.40% 33.33% 33.33% 40.00%

Leverage 17,849 0.47 0.23 0.30 0.47 0.62

Firm size 17,849 21.96 1.31 21.04 21.80 22.70

LnFirm age 17,849 2.67 0.39 2.48 2.71 2.94

Lshareholder 17,849 36.04% 15.22% 23.97% 34.05% 46.75%

ROA 17,849 3.73% 5.99% 1.33% 3.44% 6.30%

75

Table 2: Time trend

This table displays the time trend of managerial pay disparity, top executives’

compensation and accrual-based earnings management measures. The descriptions of

all variables are reported in Appendix A.

Year DA1 DA2 CEO pay CFO pay CFO pay gap Median-VPs CEO pay gap

2005 -0.0003 -0.0005 252,666 160,306 92,360 168,132 84,534

2006 0.0079 0.0069 288,751 177,891 110,859 188,356 100,395

2007 0.0070 0.0061 380,877 234,760 146,116 243,849 137,028

2008 -0.0021 -0.0014 443,019 274,881 168,138 287,074 155,945

2009 -0.0005 0.0008 462,171 289,119 173,052 305,948 156,223

2010 0.0169 0.0164 561,605 349,615 211,990 362,450 199,155

2011 0.0159 0.0167 595,807 376,270 219,537 390,528 205,279

2012 0.0062 0.0067 617,556 389,948 227,609 403,990 213,566

2013 0.0096 0.0097 650,659 415,952 234,707 426,674 223,984

2014 0.0105 0.0124 684,974 441,284 243,690 448,546 236,428

2015 0.0016 0.0031 719,093 466,718 252,376 472,073 247,020

2016 0.0033 0.0056 821,955 536,574 285,381 536,245 285,709

2017 0.0030 0.0047 926,337 631,427 294,910 620,521 305,816

76

Table 3: Correlation matrix

This table shows the correlations between variables employed in this study. The descriptions of all variables are reported in Appendix A.

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1 DA1 1.000

2 DA2 0.997 1.000

3 CFO PG 0.021 0.024 1.000

4 CEO PG 0.027 0.029 0.902 1.000

5 CEO gender -0.009 -0.010 -0.068 -0.059 1.000

6 LnCEO age -0.012 -0.012 0.089 0.103 0.019 1.000

7 CEO duality -0.004 -0.002 0.066 0.073 0.018 0.161 1.000

8 LnCEO tenure -0.012 -0.013 0.146 0.153 0.005 0.255 0.078 1.000

9 CFO gender -0.007 -0.007 -0.042 -0.025 0.039 0.025 -0.038 0.002 1.000

10 LnCFO age 0.001 0.000 -0.030 0.013 0.020 0.167 -0.047 0.094 -0.023 1.000

11 CFO director 0.011 0.011 -0.073 -0.017 0.015 0.018 0.079 0.031 0.021 0.099 1.000

12 LnCFO tenure -0.001 -0.003 -0.019 0.029 0.029 0.100 -0.069 0.291 0.017 0.306 0.105 1.000

13 LnBoard size 0.016 0.013 0.014 0.010 0.070 0.039 -0.171 0.029 0.034 0.063 0.055 0.067 1.000

14 Board independence -0.004 -0.003 -0.018 -0.006 -0.041 0.025 0.104 -0.013 0.007 0.013 -0.061 -0.025 -0.444 1.000

15 Leverage -0.131 -0.132 -0.015 0.001 0.023 0.005 -0.138 -0.001 0.053 0.032 -0.011 0.046 0.122 -0.022 1.000

16 Firm size 0.023 0.023 0.151 0.176 0.028 0.155 -0.138 0.064 0.061 0.186 -0.029 0.124 0.214 0.053 0.336 1.000

17 LnFirm age -0.002 -0.002 0.072 0.100 -0.019 0.119 -0.067 0.089 0.007 0.144 0.016 0.144 -0.039 0.013 0.183 0.180 1.000

18 Lsharerholder 0.002 0.002 -0.052 -0.053 -0.011 0.027 -0.057 -0.080 0.035 0.025 -0.041 -0.025 0.023 0.028 0.026 0.242 -0.155 1.000

19 ROA 0.169 0.174 0.132 0.130 -0.029 0.007 0.039 0.040 -0.022 -0.009 -0.006 0.009 0.015 -0.021 -0.369 0.038 -0.093 0.088 1.000

77

Table 4: Managerial pay disparity and accrual-based earnings management.

Panel A shows the estimates of the OLS regression model, controlling for industry and

year effects, to examine the influence of CFO pay gap on accrual-based EM. The

regression specification is as follows:

Accrual-based earnings management = 𝛼 + 𝛽1CFOPG+ 𝛽2CEO gender + 𝛽3LnCEO

age + 𝛽4CEO duality+ 𝛽5CEO tenure + 𝛽6CFO gender + 𝛽7LnCFO age +𝛽8CFO

director + 𝛽9LnCFO tenure + 𝛽10LnBoard size + 𝛽11Board independence +

𝛽12Leverage + 𝛽13Firm size + 𝛽14LnFirm age + 𝛽15Largest shareholder + 𝛽16ROA+ 𝜀



Panel B reports the estimates of the OLS regression model, controlling for industry and

year effects, to examine the effect of CEO pay gap on accrual-based EM. The regression

specification is as follows:

Accrual-based earnings management = 𝛼 + 𝛽1CEOPG+ 𝛽2CEO gender + 𝛽3LnCEO

age + 𝛽4CEO duality + 𝛽5LnCEO tenure + 𝛽6LnBoard size + 𝛽7Board independence +

𝛽8Leverage + 𝛽9Firm size + 𝛽10LnFirm age + 𝛽11Largest shareholder + 𝛽12ROA + 𝜀



78

Panel A: CFO pay gap and accrual-based earnings management.

Model 1 Model 2

Dependent variable DA1 DA2

CFOPG -0.027** -0.027**

(-2.130) (-2.092)

CEO gender -0.006 -0.007

(-0.921) (-0.996)

LnCEO age 0.001 0.002

(0.097) (0.193)

CEO duality 0.002 0.002

(0.524) (0.451)

LnCEO tenure -0.003* -0.003*

(-1.774) (-1.948)

CFO gender -0.004 -0.005

(-1.225) (-1.272)

LnCFO age -0.005 -0.006

(-0.403) (-0.500)

CFO director 0.007* 0.008**

(1.957) (2.145)

LnCFO tenure 0.000 -0.000

(0.100) (-0.079)

LnBoard size 0.006 0.005

(0.566) (0.482)

Board independence 0.013 0.010

(0.416) (0.332)

Leverage -0.168*** -0.167***

(-19.965) (-19.797)

Firm size 0.008*** 0.009***

(3.548) (4.081)

LnFirm age 0.023 0.024*

(1.632) (1.689)

Lsharerholder -0.013 -0.012

(-0.807) (-0.758)

ROA 0.327*** 0.339***

(15.012) (15.527)

Constant 0.236 0.203

(1.131) (0.969)


Adjusted R-squared 0.072 0.074


79

Panel B: CEO pay gap and accrual-based earnings management.

Model 1 Model 2

Dependent variable DA1 DA2

CEOPG -0.014 -0.013

(-1.032) (-0.915)

CEO gender -0.006 -0.006

(-0.837) (-0.914)

LnCEO age 0.001 0.002

(0.049) (0.137)

CEO duality 0.002 0.002

(0.553) (0.497)

LnCEO tenure -0.003** -0.004**

(-1.960) (-2.187)

LnBoard size 0.007 0.006

(0.692) (0.609)

Board independence 0.013 0.010

(0.415) (0.321)

Leverage -0.167*** -0.166***

(-19.917) (-19.744)

Firm size 0.008*** 0.009***

(3.358) (3.873)

LnFirm age 0.023* 0.024*

(1.670) (1.718)

Lsharerholder -0.013 -0.012

(-0.803) (-0.742)

ROA 0.326*** 0.338***

(14.943) (15.454)

Constant 0.032 -0.022

(0.147) (-0.099)


Adjusted R-squared 0.072 0.073


80

5. Essay three

Managerial pay disparity and firm decision-making and output: Asia-

Pacific study

5.1 Introduction

Corporate governance mechanisms influence firm decision-making and output.

Managerial pay disparity has become one of the most significant and hot corporate

governance topics in recent years. Prior literature focuses on whether and how pay

disparity between the CEO and other top executives plays a role in firm performance

and behaviours, while inconclusive evidence is presented so far. Besides, most of the

existing studies in this area are conducted utilising data from Western industrialised

societies, especially the US market. This essay will examine the influence of managerial

pay disparity on firm decision-making and output by conducting a cross-country study.

The economies I intend to investigate include China, Japan, South Korea, and

Singapore.

The impact of corporate governance mechanism on firm outcomes could be shaped by

institutional settings of the countries where the firms come from. It is suggested that

the pay disparity between the CEO and non-CEO executives reflects a firm’s leadership

style: team leadership or dominant leadership (Bebchuk et al., 2011). Thomas (2004)

argues that the CEOs are more powerful and be paid more in firms with dispersed

ownership structure than the CEOs in shareholder-control dominated firms in the US.

Aoki (1990) documents that the company's decision-making depends more on the co-

operation of all senior managers than the CEO himself in Japanese firms. On the

contrary, the CEOs could play a more important role than other executives in decision-

making in US firms. This is due to the fact that US firms’ ownership structure is more

separated, while the Japanese firms have relatively higher ownership concentration

(Aoki, 1990). Thus, the efficiency of managerial pay disparity could be subject to the

ownership structure in different countries.

Corporate compensation structure is mainly decided by the independent remuneration

committees of the board (Bebchuk & Fried, 2003). In particular, the independent

remuneration committee is mainly composed of independent directors. Thus, outsiders

could play an important role in reviewing and monitoring the compensation of top

81

executives. A large managerial pay disparity reflects the strong bargaining power of a

CEO relative to the board (Bebchuk & Fried, 2003; Dai, Kong, & Xu, 2017). It is

expected that the role of managerial pay disparity is subject to the effectiveness of the

board. For example, corporate boards in the US are outsider-dominated, which focuses

on the monitoring and advising role of independent directors. Whereas Japanese

corporate boards are insider-dominated, and one potential reason is their top

management team might be afraid to hear the suggestions and criticism from outside

directors (ASFRC, 2018). In this situation, powerful CEOs could lead to more agency

problems in firms that the monitoring roles of boards are not very effective. China has

many state-owned listed firms thus the government would affect the decision-making

of firms in different ways. China is similar to many other emerging-market countries in

that it has a concentrated corporate ownership structure (Jiang et al., 2010), and the

corporate governance is significantly weaker than that in the U.S. and other developed

countries (Allen et al., 2005). What’s more, Korea’s corporate governance is very poor

such as the collusive ties between businessmen and bureaucrats and politicians, and

unfair business transactions and practices (ASFRC, 2017). In particular, more than 95%

of Korean listed firms are controlled by families including the Chaebols. The powerful

Chaebol families can control the allocation of corporate resources even if they just hold

small stake‐holdings in the groups. Singapore is very unique among Asian countries.

According to Transparency International (2013), Singapore’s corporate governance

system has been consistently rated as one of the most political transparent and least

corrupt governments in the world. As a result, the effect of managerial pay disparity on

firm decision-making and output could be subject to different institutional settings.

In addition, the legal system is another important aspect to be considered when

researching the effectiveness of corporate governance mechanisms. China, Korea, and

Japan belong to the Civil Law System, while Singapore belongs to the Common Law

System. Porta, Lopez-De-Silanes, Shleifer, & Vishny (2002) suggest that strong legal

protection for investors (shareholders and creditors) could effectively improve

corporate governance. In particular, the valuation of companies in countries with better

shareholder protection is higher than those with a lower level of shareholder protection.

Given the fact that investor protection is poor in the Chinese market (Feng et al., 2011;

Firth et al., 2006), the efficiency of managerial pay disparity could subject to the

investor protection as well. Overall, a cross-economy study could address how

82

institutional settings and legal systems affect the role of managerial pay disparity, which

is still a research challenge in the relevant literature.


Prior studies mainly focus on the relation between managerial pay disparity and firm

performance. The inconclusive evidence is driven by the national settings. For example,

Bebchuk et al. (2011) document that CEO pay disparity measured as CPS is negatively

associated with firm performance and value in US. A high CPS reflects the relative

power and dominance of CEOs to other top executives. With larger CEO pay disparity,

the CEO has more incentives to protect their self-interests such as financial wealth and

career security. Thus, a powerful CEO is associated with more CEO entrenchment and

more agency problems that harm shareholders’ benefits (Adams et al., 2005; Landier et

al., 2012).

In contrast, large pay disparity between the CEO and non-CEO executives may not

reflect the CEO power but the CEO managerial talents. CEOs with outstanding abilities

and skills can be rewarded relatively higher salary within the top management team.

For instance, Al-Najjar et al. (2016) find that CPS is positively associated with

corporate performance in UK listed firms from 2003 to 2009. They document that CPS

is higher in firms with better corporate governance disclosure, indicating that well-

governed companies attract high talented CEOs. This is the evidence showing the

influence of institutional background on the role of managerial pay disparity. UK public

listed firms developed strengthened internal governance and established relative

independent remuneration committees. Thus, high CEO pay disparity measured as CPS

reflects the managerial talents of CEOs in UK.

In addition, managerial pay disparity is reflective of the tournament effects. Kale et al.

(2009) find that the compensation gap between the CEO and other top executives is

significantly and positively associated with firm value and accounting performance. It

is consistent with the tournament theory that a large CEO pay disparity provides

promotion-based tournament incentives for non-CEO executives, leading to greater

efforts to increase the promotion chances of becoming the next CEO (Lazear & Rosen,

1981). What’s more, Burns et al. (2017) conduct a cross-country sample to examine the

CEO tournament structure. A positive relationship is found between CEO pay disparity

and firm value after controlling for endogeneity. It is suggested that the tournaments

83

are an essential incentive mechanism to incentivise top executives and further lead to

enhanced corporate performance. However, the roles of tournament incentives are

systematically driven by firm and country cultural characteristics (Burns et al., 2017).

Therefore, it is expected that the effects of managerial pay disparity on firm decision-

making and output vary from the institutional settings and legal systems. The above

discussions lead to my hypothesis:

H1: The effects of managerial pay disparity on firm decision-making and output

vary across countries.

84

6. Proposed timeline for the completion of Dissertation

Schedule Task

July 2020

August 2020 – December 2020

January 2021 – October 2021

November 2021 – August 2022

September 2022

October 2022

Ph.D. confirmation

Complete essay one

Complete essay two

Complete essay three

Submit draft copy of the dissertation

Submit final bound copy of dissertation

85

7. References

Adams, R. B., Almeida, H., & Ferreira, D. (2005). Powerful CEOs and their impact on

corporate performance. The Review of Financial Studies, 18(4), 1403-1432.

Al-Najjar, B., Ding, R., & Hussainey, K. (2016). Determinants and value relevance of

UK CEO pay slice. International Review of Applied Economics, 30(3), 403-421.

Allen, F., Qian, J., & Qian, M. J. (2005). Law, finance, and economic growth in China.

Journal of Financial Economics, 77, 57–116.

Armstrong, C. S., Jagolinzer, A. D., & Larcker, D. F. (2010). Chief Executive Officer

equity incentives and accounting irregularities. Journal of Accounting Research,

48(2), 225–271.

ASFRC. (2017). Corporate Governance, Regulation and the Impact of Chaebols on the

International Competitiveness of the Korean Economy. Seoul.

ASFRC. (2018). Board Governance in Japan: The Current State and Beyond. Tokyo.

Aoki, M. (1990). Toward an economic model of the Japanese firm. Journal of

Economic Literature, 28, 1–27.

Baker, T. A., Lopez, T. J., Reitenga, A. L., & Ruch, G. W. (2019). The influence of

CEO and CFO power on accruals and real earnings management. Review of

Quantitative Finance & Accounting, 52, 325–345.

Bebchuk, L. A., Cremers, K. M., & Peyer, U. C. (2011). The CEO pay slice. Journal of

Financial Economics, 102(1), 199-221.

Bebchuk, L. A., & Fried, J. M. (2003). Executive compensation as an agency problem.

Journal of Economic Perspectives, 17(3), 71-92.

Bebchuk, L. A., Fried, J. M., & Walker, D. I. (2002). Managerial power and rent

extraction in the design of executive compensation. National bureau of

economic research.

Becker, B. E., & Huselid, M. A. (1992). The incentive effects of tournament

compensation systems. Administrative Science Quarterly, 336-350.

86

Bergstresser, D., & Philippon, T. (2006). CEO incentives and earnings management.

Journal of Financial Economics, 80(3), 511-529.

Bugeja, M., Matolcsy, Z., & Spiropoulos, H. (2017). The CEO pay slice: Managerial

power or efficient contracting? Some indirect evidence. Journal of

Contemporary Accounting & Economics, 13(1), 69-87.

Burns, N., & Kedia, S. (2006). The impact of performance-based compensation on

misreporting. Journal of Financial Economics, 79(1), 35-67.

Burns, N., Minnick, K., & Starks, L. (2017). CEO tournaments: A cross-country

analysis of causes, cultural influences, and consequences. Journal of Financial

and Quantitative Analysis, 52(2), 519-551.

Byrnes, J. P., Miller, D. C., & Schafer, W. D. (1999). Gender differences in risk taking:

a meta-analysis. Psychological Bulletin, 125(3), 367-383.

Charness, G., & Gneezy, U. (2012). Strong evidence for gender differences in risk

taking. Journal of Economic Behavior & Organization, 83(1), 50-58.

Chen, C. J., Li, Z., Su, X., & Sun, Z. (2011). Rent-seeking incentives, corporate political

connections, and the control structure of private firms: Chinese evidence.

Journal of Corporate Finance, 17(2), 229-243.

Chen, K. C., & Yuan, H. (2004). Earnings management and capital resource allocation:

Evidence from China's accounting-based regulation of rights issues. The

Accounting Review, 79(3), 645-665.

Chen, Z., Huang, Y., & Wei, K. C. J. (2013). Executive pay disparity and the cost of

equity capital. Journal of Financial & Quantitative Analysis, 48(3), 849-885.

10.1017/S0022109013000306

Cheng, Q., & Warfield, T. D. (2005). Equity incentives and earnings management. The

Accounting Review, 80(2), 441-476.

Chintrakarn, P., Chatjuthamard, P., Tong, S., & Jiraporn, P. (2018). How do powerful

CEOs view dividends and stock repurchases? Evidence from the CEO pay slice

(CPS). International Review of Economics & Finance, 58, 49-64.

87

Correa, R., & Lel, U. (2016). Say on pay laws, executive compensation, pay slice, and

firm valuation around the world. Journal of Financial Economics, 122(3), 500-

520.

Dai, Y., Kong, D., & Xu, J. (2017). Does fairness breed efficiency? Pay gap and firm

productivity in China. International Review of Economics & Finance, 48, 406-

422.

Dechow, P. M., Sloan, R. G., & Sweeney, A. P. (1995). Detecting earnings management.

The Accounting Review, 193-225.

Demers, E. A., & Wang, C. (2010). The impact of CEO career concerns on accruals

based and real earnings management. Available at SSRN 1466029

Ehrenberg, R. G., & Bognanno, M. L. (1990). The incentive effects of tournaments

revisited: Evidence from the European PGA tour. Industrial & Labor Relations

Review, 43(3), 74-S-88-S.

Eriksson, T. (1999). Executive compensation and tournament theory: Empirical tests

on Danish data. Journal of Labor Economics, 17(2), 262-280.

Faccio, M., Masulis, R. W., & McConnell, J. J. (2006). Political connections and

corporate bailouts. The Journal of Finance, 61(6), 2597-2635.

Faleye, O., Reis, E., & Venkateswaran, A. (2013). The determinants and effects of

CEO–employee pay ratios. Journal of Banking & Finance, 37(8), 3258-3272.

10.1016/j.jbankfin.2013.03.003

Feng, M., Ge, W., Luo, S., & Shevlin, T. (2011). Why do CFOs become involved in

material accounting manipulations? Journal of Accounting and Economics,

51(2), 21–36.

Field, L., Lowry, M., & Mkrtchyan, A. (2013). Are busy boards detrimental? Journal

of Financial Economics, 109(1), 63-82. 10.1016/j.jfineco.2013.02.004

Finkelstein, S. (1992). Power in top management teams: Dimensions, measurement,

and validation. Academy of Management Journal, 35(3), 505-538.

88

Firth, M., Fung, P. M. Y., & Rui, O. M. (2006). Firm performance, governance structure

and top management turnover in a transitional economy. Journal of

Management Studies, 43, 1289-1330.

Geiger, M. A., & North, D. S. (2006). Does hiring a new CFO change things? An

investigation of changes in discretionary accruals. The Accounting Review,

81(4), 781–809.

Goel, A. M., & Thakor, A. V. (2008). Overconfidence, CEO selection, and corporate

governance. The Journal of Finance, 63(6), 2737-2784.

Grabke-Rundell, A., & Gomez-Mejia, L. R. (2002). Power as a determinant of

executive compensation. Human Resource Management Review, 12(1), 3-23.

Graham, J., Harvey, C., & Rajgopal, S. (2005). The economic implications of corporate

financial reporting. Journal of Accounting and Economics, 40(1), 3–73.

Hambrick, D. C., & Mason, P. A. (1984). Upper echelons: The organization as a

reflection of its top managers. Academy of Management Review, 9(2), 193-206.

Han, S., Nanda, V. K., & Silveri, S. (2016). CEO power and firm performance under

pressure. Financial Management, 45(2), 369-400.

Haß, L. H., Müller, M. A., & Vergauwe, S. (2015). Tournament incentives and

corporate fraud. Journal of Corporate Finance, 34, 251-267.

Haveman, H. A., & Wang, Y. (2013). Going (more) public: institutional isomorphism

and ownership reform among Chinese firms. Management & Organization

Review, 9(1), 17–51.

Haw, I. M., Qi, D., Wu, D., & Wu, W. (2005). Market consequences of earnings

management in response to security regulations in China. Contemporary

Accounting Research, 22(1), 95-140.

Healy, P. M. (1985). The effect of bonus schemes on accounting decisions. Journal of

Accounting and Economics, 7(1-3), 85-107.

Hickson, D. J., Hinings, C. R., Lee, C. A., Schneck, R. E., & Pennings, J. M. (1971). A

strategic contingencies' theory of intraorganizational power. Administrative

Science Quarterly, 216-229.

89

Hu, F., Pan, X., & Tian, G. (2013). Does CEO pay dispersion matter in an emerging

market? Evidence from China's listed firms. Pacific-Basin Finance Journal, 24,

235-255.

Jensen, M. C. (2001). Value maximization, stakeholder theory, and the corporate

objective function. Journal of Applied Corporate Finance, 14(3), 8-21.

Jensen, M. C., & Murphy, K. J. (1990). Performance pay and top-management

incentives. Journal of Political Economy, 98(2), 225-264.

Jiang, J. X., Petroni, K. R., & Wang, I. Y. (2010). CFOs and CEOs: Who have the most

influence on earnings management? Journal of Financial Economics, 96(3),

513-526.

Jiraporn, P., Chintrakarn, P., & Liu, Y. (2012). Capital structure, CEO dominance, and

corporate performance. Journal of Financial Services Research, 42(3), 139-158.

Jones, J. J. (1991). Earnings management during import relief investigations. Journal

of Accounting Research, 29(2), 193-228. 10.2307/2491047

Kale, J. R., Reis, E., & Venkateswaran, A. (2009). Rank-order tournaments and

incentive alignment: The effect on firm performance. The Journal of Finance,

64(3), 1479-1512. 10.1111/j.1540-6261.2009.01470.x

Kini, O., & Williams, R. (2012). Tournament incentives, firm risk, and corporate

policies. Journal of Financial Economics, 103(2), 350-376.

Kubick, T. R., & Masli, A. N. (2016). Firm-level tournament incentives and corporate

tax aggressiveness. Journal of Accounting and Public Policy, 35(1), 66-83.

Lambert, R. A., Larcker, D. F., & Weigelt, K. (1993). The structure of organizational

incentives. Administrative Science Quarterly, 438-461.

Landier, A., Sauvagnat, J., Sraer, D., & Thesmar, D. (2012). Bottom-up corporate

governance. Review of Finance, 17(1), 161-201.

Lazear, E. P., & Rosen, S. (1981). Rank-order tournaments as optimum labor contracts.

Journal of Political Economy, 89(5), 841-864.

90

Lee, K. W., Lev, B., & Yeo, G. H. H. (2008). Executive pay dispersion, corporate

governance, and firm performance. Review of Quantitative Finance and

Accounting, 30(3), 315-338.

Lin, C., Shen, W., & Su, D. (2009). Corporate tournament and executive compensation

in a transition economy: evidence from publicly listed firms in China. Available

at SSRN 1393507

Lin, Y., Yeh, Y. M. C., & Shih, Y. (2013). Tournament theory's perspective of

executive pay gaps. Journal of Business Research, 66(5), 585-592.

Liu, Q., & Lu, Z. J. (2007). Corporate governance and earnings management in the

Chinese listed companies: A tunneling perspective. Journal of Corporate

Finance, 13(5), 881-906.

Main, B. G., O'Reilly III, C. A., & Wade, J. (1993). Top executive pay: Tournament or

teamwork? Journal of Labor Economics, 11(4), 606-628.

Mande, V., & Son, M. (2012). CEO centrality and meeting or beating analysts’ earnings

forecasts. Journal of Business Finance & Accounting, 39(1‐2), 82-112.

Masulis, R. W., & Mobbs, S. (2011). “Are all inside directors the same? Evidence from

the external directorship market. Journal of Finance, 66, 823–872.

Mian, S. (2001). On the choice and replacement of chief financial officers. Journal of

Financial Economics, 60(4), 143–175.

Murphy, K. J. (1999). Executive compensation. Handbook of Labour Economics

Palia, D. (2001). The endogeniety of managerial compensation in firm valuation: A

solution. Review of Financial Studies, 14, 735-764.

Park, K. (2017). Pay disparities within top management teams and earning management.

Journal of Accounting and Public Policy, 36(1), 59-81.

10.1016/j.jaccpubpol.2016.11.002

Pfeffer, J. (1981). Power in Organizations (Vol. 33): Pitman Marshfield, MA.

Porta, R. L., Lopez-De-Silanes, F., Shleifer, A., & Vishny, R. (2002). Investor

protection and corporate valuation. The Journal of Finance, 57(3), 1147-1170.

10.1111/1540-6261.00457

91

Prendergast, C. (2002). The tenuous trade-off between risk and incentives. Journal of

Political Economy, 110(5), 1071-1102. 10.1086/341874

Rajan, R. G., & Wulf, J. (2006). The flattening firm: Evidence from panel data on the

changing nature of corporate hierarchies. Review of Economics and Statistics,

88, 759–773.

Ramakrishan, R. T., & Thakor, A. V. (1991). Cooperation versus competition in agency.

The Journal of Law, Economics, and Orgnization, 7, 248.

Ridge, J. W., Aime, F., & White, M. A. (2015). When much more of a difference makes

a difference: Social comparison and tournaments in the CEO's top team.

Strategic Management Journal, 36(4), 618-636.

Schipper, K. (1989). Commentary on earnings management. Accounting Horizons(3),

91-102.

Siegel, P. A., & Hambrick, D. C. (2005). Pay disparities within top management groups:

Evidence of harmful effects on performance of high-technology firms.

Organization Science, 16(3), 259-274.

Thomas, R. (2004). Explaining the international CEO pay gap: Board capture or market

driven? Vanderbilt Law Review, 1171–1267.

Transparency International. (2013). Global Corruption Barometer. Retrieved

Zhang, H., Huang, H. J., & Habib, A. (2018). The effect of tournament incentives on

financial restatements: evidence from China. The International Journal of

Accounting, 53(2), 118-135.

managerial pay disparity and firm...

Documents