CEO Compensation, Expropriation, and the Balance of Power among Large Shareholders

Abstract

Purpose – This study explores the probability of expropriation of minority shareholders by controlling shareholders in the form of CEO compensation under an imperfect governance institution by using a novel Chinese dataset over 2001–2010. Design/methodology/approach – We use a direct method to gauge controlling shareholders’ tunneling and expropriation of minority shareholders, and we present a simple model to link corporate governance and the degree of entrenchment by the largest shareholder. We use both Logit and Probit models to predict the likelihood of tunneling and use two-stage least square (2SLS) regression to address the endogeneity issues. Findings – There are significant deterioration effects between controlling shareholder's tunneling and firm performance. Firms with more tunneling activities typically have larger controlling ownership, greater evidence of state control, less balance of power among large shareholders, and weaker board characteristics. Research limitations/implications – The positive relationship between controlling shareholders’ tunneling and executive compensation implies that the controlling shareholder might divert personal benefits from the public firms at the expense of minority shareholders. Originality/value – We focus on the effects of corporate governance restructuring on executive compensation and controlling shareholders’ tunneling in the Chinese context, and we also investigate whether these effects are stronger with the involvement of state ownership. We empirically address the issues between executive compensation and expropriation of minority shareholders.