Thesis
Deferred executive compensation and double-layered principal-principal conflicts
- Creator
- Rights statement
- Awarding institution
- University of Strathclyde
- Date of award
- 2024
- Thesis identifier
- T16887
- Person Identifier (Local)
- 201977089
- Qualification Level
- Qualification Name
- Department, School or Faculty
- Abstract
- This research examines the policy effect of ‘salary restriction order’ on the double-layered principal-principal conflicts in Chinese State-Owned Enterprises (SOEs). According to current agency problems in highly concentrated firms in China, this research elaborates on the traditional Type Ⅱ Agency Problem based on the seminal Double-Layered Agency Theory (Raelin and Bondy, 2013) from the second-layered social perspective, arguing both economic-layered principal-principal conflicts between large/controlling shareholders and the economic-layered principals (i.e., minority shareholders and outside creditors) and the overlooked societal-layered principal-principal conflicts caused by the large/controlling shareholders towards the company’s primary social and environmental stakeholders. This new theoretical contribution is defined as the Double-Layered Principal-Principal Theory. Because of the inevitable political affiliation and SOE managers’ special political promotion, corporate governance mechanisms derived from the traditional Agency Theory based on the Western market with separated ownership and control lack effectiveness (Jiang and Kim, 2015; 2020). Moreover, the most commonly used approach in the Type Ⅱ Agency Problem studies, Multiple Large Shareholders (MLS), shows negative collusion among these large shareholders in China. Therefore, this research explores potential corporate governance mechanisms to mitigate the double-layered principal-principal conflicts in Chinese SOEs. Starting January 1st, 2010, the State-Owned Assets Supervision and Administration Commission of the State Council (SASAC) required executives and top management team (TMT) in charge of the central enterprises to defer 40% annual performance-based salary in a 3-year tenure. I find this ‘salary restriction order’ provides an appropriate opportunity to examine the policy effects of deferred executive compensation (DEC) on the double-layered principal-principal conflicts the Chinese SOEs are confronting. This research tests panel data of 74 listed SASAC subsidiaries from 2007 to 2015. It uses the ‘salary restriction order’ as an exogenous shock to conduct a quasi-natural experiment to examine the policy effects of DEC on the double-layered principal-principal conflicts. Unlike most US studies, this research found inconsistent results of the CEO Inside Debt Theory (Edmans and Liu, 2011). Rather than risk-moderating, the findings show an insignificant association between DEC and corporate risk and a direct impact on declining dividend pay-out and increasing tunnelling behaviour via related-party transactions. It indicates that DEC may not mitigate the economic-layered risk preference between large shareholders and outside creditors. Even worse, limiting executive pay is likely to accelerate wealth expropriation from large shareholders towards minority shareholders, intensifying the traditional economic-layered principal-principal conflicts. Moreover, consistent with the view of Long-Run Net Social Benefits (Kane, 2002), this research found a direct positive association between DEC and the quality of the social and environmental disclosure index (SEDI), demonstrating that DEC may be a potential corporate governance mechanism to alleviate the societal-layered principal-principal conflicts in Chinese SOEs. The robustness checks, including parallel trend tests and placebo tests, and 2SLS regressions, Sobel tests and Bootstrap tests examining the risk-moderating effect of DEC, are consistent with the previous findings. The findings carry important policy implications. It reveals that limiting executive pay would increase the traditional economic-layered principal-principal conflicts, which are unlikely to play a role in protecting the interests of small and medium-sized investors in China. Therefore, policymakers must consider specific agency problems within the national context when formulating corporate governance regulations. It necessitates a departure from the uncritical application of conventional methodologies. In this case, policymakers in China should avoid straightforwardly cutting down executives’ pay without properly adjusting the length, ratios, or portfolios of other types of deferred compensation and pension plans for the executives’ long-term incentives. The research contributions are as follows. First, elaborating the theoretical framework of the Agency Theory, this research proposes a Double-Layered Principal-Principal Theory, extending beyond the economic-layered principal-principal conflicts to encompass the second societal-layered principal-principal conflicts arising from the large/controlling shareholders towards the company’s primary social and environmental stakeholders in highly concentrated firms. Second, this research establishes a strong theoretical causality in examining the association between DEC and corporate social performance (measured by SEDI). Previous studies failed to demonstrate a theoretical causality between these two variables. Filling the gap, this research reports evidence (Mayberry, 2020) that risk-moderating can serve as a mediator variable to link the association between DEC and corporate social performance. Third, consistent with the literature chapter, the methodology chapter develops a new SEDI to measure the ‘societal-layered principal-principal conflicts’ in China. In addition, the findings enrich the CEO inside debt studies by providing robust evidence showing insignificant correlations between DEC and corporate risk. It also suggests that Chinese policymakers re-evaluate the ‘salary restriction order’ based on its potential consequences.
- Advisor / supervisor
- Hsu, Yu-Lin
- McColgan, Patrick
- Coulson, Andrea
- Resource Type
- DOI
- Date Created
- 2023
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PDF of thesis T16887 | 2024-04-29 | Público | Descargar |