The governance role of institutional investors in management compensation: evidence from China

Journal Article (Journal Article)

This study examines whether and how institutional investors play a corporate governance role in executive pay in China. Based on a sample of Chinese listed firms from 2005 to 2015, we find that higher institutional investor ownership is negatively related to excessive management compensation; this indicates that institutional investors play a governance role in listed firms’ decisions on management payment. Institutional investors are more likely to have an influence on executive compensation through their representatives on the corporate board or by conducting site visits, especially when their ownership is high. They will also react, as in the US, by ‘voting with their feet’; that is, holding fewer shares than they would otherwise, if firms pay excessive executive compensation, especially when their ownership is low. Cross-sectional analyses show that the negative impact of institutional ownership on excess management compensation is more evident when firms are not owned by the government, monitored by fewer analysts, and located in regions of China with weak legal investor protection. Our results indicate that institutional investors in China can play an important governance role, especially for firms with characteristics such as location and analyst coverage, for which outside monitoring mechanisms will be in high demand.

Full Text

Duke Authors

Cited Authors

  • Zhu, S; Huang, H; Bradford, W

Published Date

  • April 1, 2022

Published In

Volume / Issue

  • 62 / S1

Start / End Page

  • 1015 - 1063

Electronic International Standard Serial Number (EISSN)

  • 1467-629X

International Standard Serial Number (ISSN)

  • 0810-5391

Digital Object Identifier (DOI)

  • 10.1111/acfi.12817

Citation Source

  • Scopus