Lerong He

CEO Compensation and Corporate Governance in China

We analyze CEO pay in China’s public traded firms from 2000 to 2010. We find that Chinese CEO pay is made up mainly of salaries and bonuses. Firms can legally grant stock options since 2005, but the take up of these has been slow. We find that CEO equity ownership is higher in firms with higher CEO pay, more outside directors, combined CEO and chair, compensation committees, and better stock returns. We document that CEO pay is positively correlated to both accounting and stock market performance, although the link to accounting performance is more robust. CEO pay is higher in firms with more growth opportunities, compensation committees, and combined CEO and Chair. We find that CEO pay dynamics are important as pay this year is significantly positively correlated to CEO pay last year. Boards and compensation committees adjust CEO to target levels over a number of years. In addition, our study documents substantial changes in Chinese corporate governance over time. The Chinese State is less likely to be the ultimate owner of public firms, ownership concentration has declined, and internal firm governance has improved significantly as evidenced by a greater fraction of outsiders on the board and the adoption of compensation committees.

CEO Turnover in China: The Role of Market-Based and Accounting Performance Measures

Manuscript Type: Empirical Research Question/Issue: This study investigates the relation between CEO turnover and firm performance in China’s listed firms. The study examines how the sensitivity of CEO turnover to firm performance is moderated by the private control of firms, the presence of a majority shareholder and the presence of independent directors on the board. Research Findings/Insights: Using a panel of about 1200 Chinese firms per year from 1999 to 2006 we find significant changes in the ownership and control of firms. The private control of firms and the fraction of independent directors on the board have increased considerably over time. The study finds a significant negative association between CEO turnover and firm performance consistent with the agency model. There is evidence that the CEO turnover sensitivity for poor performance is greater in firms that are privately controlled, or have a majority shareholder, or have a greater fraction of independent directors on the board. Theoretical/Academic Implications: This study provides empirical support for the agency model and the importance of internal corporate governance to attenuate agency costs. It provides important insights into firm governance in transition economies. Practitioner/Policy Implications: This study offers insights to policy makers interested in enhancing the design of internal corporate governance within transition economies.

Executive Compensation and Corporate Fraud in China

This study investigates the relation between CEO compensation and corporate fraud in China. We document a significantly negative correlation between CEO compensation and corporate fraud using data on publicly traded firms between 2005 and 2010. Our findings are consistent with the hypothesis that firms penalize CEOs for fraud by lowering their pay. We also find that CEO compensation is lower in firms that commit more severe frauds. Panel data fixed effects and propensity score methods are used to demonstrate these effects. Our results also indicate that corporate governance mechanisms influence the magnitude of punishment. We find that CEOs of privately controlled firms, firms that split the posts of CEO and chairman, and CEOs of firms located in developed regions suffer larger compensation penalties for committing financial fraud. Finally, we show that CEOs at firms that commit fraud are more likely to be replaced compared to those at non-fraud firms.

The 150 Credit-hour Requirement and CPA Examination Pass Rates—A Four Year Study

Debate concerning the minimum educational requirements of certified public accountant (CPA) candidates in the USA has been taking place for decades. This paper compares the sectional pass rates of CPA candidates from jurisdictions requiring 150 credit hours of college study with the pass rates of candidates from jurisdictions not requiring 150 credit hours for the years 2004 to 2007. The paper finds that jurisdictions with a 150 credit-hour requirement have materially higher pass rates in areas of Auditing and Regulation, but not in the areas of Financial Accounting and Reporting or Business Environment and Concepts. The paper also finds that, on average, increasing a CPA candidates formal education requirement results in improved candidate performance, but that some jurisdictions without the 150 credit-hour requirement consistently have sectional pass rates above the national average. Terms which may be unfamiliar to readers outside the USA are defined in the footnotes.

CEO COMPENSATION, INCENTIVES, AND GOVERNANCE IN NEW ENTERPRISE FIRMS

This study investigates executive compensation, corporate governance and the determination of CEO equity incentives in US entrepreneurial high technology firms. We find the following. First, CEO equity incentives in these new enterprise firms are twenty times larger than that which previous large firm studies have found. Second, both economic factors (firm size, growth opportunities, and risk) and governance factors (founder, venture capitalist presence, board structure, and ownership distribution) determine CEO incentives in these firms. We document instances where direct monitoring arrangements (e.g. venture capitalist monitoring) act as substitutes for explicit incentives in aligning shareholder and CEO interests.

Firm Performance and Boardroom Gender Diversity: A Quantile Regression Approach

We investigate the relation between firm performance and boardroom gender diversity using quantile regression methods. Using annual data on over 3000 US firms from 2007 to 2014, we show that the presence of women on the board has a positive effect on firm performance, and this effect varies at different parts of the performance distribution. Critically, we demonstrate that the presence of women directors alters the dispersion of firm performance. Our quantile regression results suggest that female directors have a significantly larger positive impact in high-performing firms relative to low-performing firms. The board gender diversity effect is not homogeneous as assumed in previous research. In addition, we account for the endogenous selection of women to the board. Using instrumental variable quantile regression, we find that in general there is a positive correlation between firm performance and board gender diversity. Overall, we suggest that boardroom gender diversity has an effect on both the conditional mean and the dispersion of firm performance, and quantile regression adds value to the empirical examination of the performance impact of board gender diversity.

Star CEOs or Political Connections? Evidence from China's Publicly Traded Firms

This paper studies Chinas “star CEOs” defined as members of the National Peoples Congress (NPC) or the National Committee of the Chinese Peoples Political Consultative Conference (CPPCC) and “politically connected” CEOs who have previous government or military experience. We evaluate the effect of “star CEOs” and “politically connected” CEOs on firm performance and CEO compensation. We find that announcement date returns, CEO compensation and incentives are all higher in firms that appoint “star CEOs”. However, the mechanism explaining these various premiums is largely political connectedness of these star CEOs. Our study finds only modest evidence that star-CEO status directly determines firm performance. Our analysis strongly suggests that compensation and performance premiums are mostly driven by CEO political connections, as opposed to CEO talent/star effects.

The Anglo-Saxon corporate governance model in Asia

This paper investigates the effectiveness of the Anglo-Saxon corporate governance model in Asia. The paper finds that all of the investigated Asian economies issued new corporate governance codes to promote best practices in the Anglo-Saxon model after the 1997-1998 Asian financial crisis. In our sample, the majority of listed firms in Asia implement a separate CEO/chairperson position and appoint a significant number of non-executive directors on the board. The result of this study also indicates that the prediction of the agency theory is valid under the Asian context. Using the combined sample of all Asian economies, we find that ownership concentration has a positive relation on firm performance and the controlling shareholders ownership has a decreasing positive link with firm value. In addition, firms with a board dominated by non-executive directors are associated with higher performance, and smaller boards are linked with better performance. The paper also finds that the Anglo-Saxon corporate governance model is more effective in Asian countries adopting the continental law system and without the influence of Confucian values.

Managerial Labor Market during Institutional Transition: A Study of CEO Compensation and Voluntary Turnover

Manuscript Type Empirical Research Question/Issue This paper investigates the influence of CEO compensation on voluntary turnover and the moderating role of the managerial labor market. It explores how institutional contingencies related to labor market transparency, mobility, and competitiveness shape supply and demand conditions of the managerial labor market, and consequently affect the relationship between CEO underpayment and turnover. Research Findings/Insights Using a sample of Chinese listed firms between 2002 and 2011, we document that underpaid CEOs are associated with a larger likelihood of voluntary turnover in China. Importantly, we find that CEO underpayment will increase the likelihood of voluntary turnover to a greater extent when executive compensation disclosure is mandatory, when regional labor mobility is higher, and when industry growth rate is larger. Overall, our study demonstrates that underpayment below the market rate motivates CEOs to exit their organizations and such a reaction is more likely to materialize when managerial labor market conditions are favorable enough to create a strong pull force. Theoretical/Academic Implications This study adopts an interdisciplinary perspective built on institutional theory, organizational psychology, and labor economics to examine the role of the managerial labor market during institutional transition. It integrates the social psychological explanation of turnover with the perspective of labor economics by linking both pull side and push side drivers of organizational participation with demand and supply conditions of the managerial labor market. Practitioner/Policy Implications This study suggests that the design of executive compensation should consider the ongoing labor market rate for retention and motivation reasons, especially when managerial talent is under tight supply and strong demand.

Chinese executive compensation: the role of asymmetric performance benchmarks

We study asymmetric performance benchmarking in Chinese executive compensation contracts between 2000 and 2010. We predict that while relative performance evaluation criteria are important in executive pay contracts, managerial power and influence will result in a decoupling between pay and performance. We predict that Chinese managers are rewarded for superior performance but not penalized for inferior performance. We test this asymmetric pay-for-performance hypothesis using three performance benchmarks: whether firm performance is positive/negative, above/below industry average, and above/below regional average. We find the sensitivity between executive compensation and firm accounting performance is asymmetric. It is significantly stronger when firm accounting performance is positive or firm performance exceeds industry or regional median benchmarks compared to cases when firm accounting performance is negative or is below industry or regional median benchmarks. We find little evidence that ownership structure and internal governance mechanisms moderate the asymmetric pay-for-performance relationship.