Does Ownership Reform Influence Executive Pay in China?

Abstract

The Split Share Structure Reform in China enables state shareholders of listed firms to trade their restricted shares. This renders the wealth of state shareholders more related to share price movements. We predict this reform will create remuneration arrangements that increase the relationship between Chinese firms’ executive pay and stock market performance. We confirm this prediction by showing such effect among state-controlled firms and especially those where dominant shareholders have greater incentives to improve share return performance. Our results indicate this reform strengthens the accountability of executives to external monitoring by stock market and therefore benefit minority shareholders in China. (First version: 29 March 2010)