Product Market Competition and Performance Sensitivity of Executive Compensation: Evidence from the Emerging Markets

• In Event: Accounting Conservatism: International Evidence
  In Paper Session: Accounting Conservatism, Compensation, and Auditing: International Evidence

Abstract

Based on the relative compensation theory (e.g., Holmstrom 1982; Banker and Datar 1989), we explore the relationship between product market competition and the performance sensitivity of executive compensation. We use emerging markets as a unique setting to investigate the link between product market competition and pay-performance sensitivity of executive compensation since market competition mechanism can be better used to reduce agency cost due to the relatively weaker corporate governance characteristics in such markets compared with developed economies. Using a sample of 7,558 firm-year observations from the Chinese stock markets for the period of 2007-2012, we find that product market competition has a significant impact on performance sensitivity of executive compensation. In particular, when listed companies are in an industry of lower concentration, i.e., there is a more intense product market competition, the performance sensitivity of executive compensation will be higher. When a firm is ranked at a higher competitive position in the industry and stronger pricing power market share, the performance sensitivity of executive compensation will also be higher. Our findings indicate significant impacts of market competition on executive remuneration.

Authors

• Haiyan Helen Zhou, The University of Texas–Pan American

• Hanwen Chen, Xiamen University

• Liquan Xing, Xiamen University