Minority shareholder activism, threat of exit and pay-performance sensitivity

Abstract

This study investigates whether and how minority shareholders activism (MSA) affects executives’ pay–performance sensitivity (PPS). Based on annual data of listed companies on SSE and SZSE from 2010 to 2021, we find that MSA significantly promotes executives’ pay-performance sensitivity, through the mechanism of disciplining management with exit threats. Such effect is prominent only for non-SOE firms. The results are robust after mitigating endogeneity issues and using one-period-lagged MSA. Our findings indicate that minority shareholder activism plays an important role in improving the effectiveness of executive compensation contracts.