Corruption-induced CEO compensation: Evidence from a natural experiment in China

54 Pages Posted: 5 May 2021

See all articles by Dongmin Kong

Dongmin Kong

Department of Finance, Huazhong University of Science and Technology

Ling Zhu

Huazhong University of Science and Technology

Date Written: May 1, 2021

Abstract

While China has witnessed a combination of rapid economic growth and severe corruption, few studies have examined the effects of corruption on executive incentives at the firm level. This study identifies the causal relationship between corruption and CEO compensation. We exploit a quasi-natural experiment (i.e., the investigations of the Central Commission for Discipline Inspection) to document that CEO compensation substantially increases by approximately 5% after the exogenous anti-corruption campaign. Mechanism analysis shows that the reduction of corruption resulting from China’s anti-corruption increases CEO pay through improving firm productivity, enhancing firm innovation, and increasing CEO turnover. We also find the anti-corruption campaign promotes the sensitivity of CEO compensation to corporate performance and improves incentive efficiency in non-state-owned enterprises. Firms with high exposure to the corrupt environment and in high-tech industries, the positive effect is strengthened. Newly hired CEOs, as well as CEOs with professional research skills, overseas experience, and greater ability, benefit more from China’s anti-corruption campaign. Our results are robust to alternative specifications.

Keywords: corruption, CEO compensation, incentive efficiency, natural experiment, China

JEL Classification: G30

Suggested Citation

Kong, Dongmin and Zhu, Ling, Corruption-induced CEO compensation: Evidence from a natural experiment in China (May 1, 2021). Available at SSRN: https://ssrn.com/abstract=3837898 or http://dx.doi.org/10.2139/ssrn.3837898

Dongmin Kong (Contact Author)

Department of Finance, Huazhong University of Science and Technology ( email )

Wuhan, Hubei 430074
China

Ling Zhu

Huazhong University of Science and Technology ( email )

1037 Luoyu Road
Wuhan, Hubei 430074
China

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