Abstract
In this paper, we empirically analyze the effects that the geographical relationships between chairman and CEO have on the latter’s compensation contracts, based on samples of listed A-share private firms from 2005 to 2014. We find that geographical relationships are related to lower pay–performance sensitivity, and that the correlation mainly exists in poor performance periods, suggesting that geographical relationships weaken the effectiveness of compensation contracts. We also find that geographical relationships can be substituted by external formal institutions.
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