Abstract
This paper investigates the impact of social trust, an extremely important informal institution, on corporate governance. We use the data of 2008-2016 China’s A share listed private companies, to study how the regional social trust environment affect the efficiency of salary incentive mechanism on CEOs. We find that social trust can significantly improve the effect of executive compensation incentive, namely the compensation of the senior executive is more sensitive to performance in a firm with higher social trust. In particular, social trust can be an effective alternative to formal institution and plays an important role in corporate governance when the formal institution faced by the company is undeveloped.
Highlights
Many scholars have begun to discuss the moral basis of the market economy and believe that a well-functioning market order requires some moral support
This paper investigates the impact of social trust, an extremely important informal institution, on corporate governance
Social trust can be an effective alternative to formal institution and plays an important role in corporate governance when the formal institution faced by the company is undeveloped
Summary
Many scholars have begun to discuss the moral basis of the market economy and believe that a well-functioning market order requires some moral support. This paper combines the two to study the impact of informal institutional social trust factors on executive compensation sensitivity and performance-based executive dismissal in the human factors of the company’s external environment, and improve the research of social factors and governance of corporation relationships. It provides a reference for the company’s incentives or supervision of executives, as well as the trade-off between incentives and supervision. The empirical results of this paper are summarized and the future research directions are proposed
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