Managerial Power,Compensation Stickiness And Enterprises Investment

Optimal contract theory indicates that managers compensation are based on the contract designed by the board to secured the mutual benefit and resolve the agency conflicts. Due to the managerial self-interested behavior, the foundations of the settlement on compensation(the board bargaining power, market constraints, as well as the acceptance of compensation contract) are hard to fulfill and resulted in an abnormal high salary which is unrelated to the assessment of performance among enterprises. The risk of human capital cannot be diversified as financial capital while the managerial compensation and reputation cannot be separated from the enterprise. Thus the executives attempt to disrupt the efficiency of compensation contract by managerial power. Compensation contract highlights the performance sensitivity of compensation, which is “stickiness” in China. Compensation stickiness is widely dispersed among the enterprises of mainland China, which brings a more significant reward of compensation in an optimistic enterprise performance rather than a less severe punishment during bad time. The undermined performance sensitivity caused by the managerial power has two facets: on the one hand it helps to prevent a fall of compensation during bad times, and on the other hand it undermines the surging of compensation in optimistic environment. Therefore the enforcement of an asymmetric influence on the performance sensitivity of compensation is used as a trick so that compensation is more sensitive to the optimistic performance while less sensitive to the weak performance. In that way, a lower human capital risk is secured derived from the increase of managerial compensation stickiness.Agency problems cause capital overinvestment as well as underinvestment. The optimal compensation contract has been regarded as the common mechanism for the coordination of the managerial behavior as well as the stockholder motivation so as to minimize the influence of agency problems. The compensation contract affect the capital decisions in two aspects: on the one hand, the compensation contract can coordinate the consistency of managers and shareholders, reduce the self-interested activities of managers, reduce the acceptance of negative-NPV projects, inhibit overinvestment; on the other hand, the compensation contract promote the acceptance of positive-NPV investment projects, and relieve the capital pressure. And to some extent, the stickiness of managerial compensation reflects an ineffectiveness of compensation contract since managerial compensation stickiness would exaggerate the agency problems. The stickiness has enforced the managerial compensation to be more attractive in an optimistic environment and more merciful under a weak performance. The cost of new investment decisions which implemented by managers is so rare that the managers could stay out of it. The compensation stickiness leads to an ineffective investment tendency since the mangers are able to attain self-interested asymmetric investment benefits.The direct economic consequence of investment activities is the expanding of the enterprise scale. Within the gradually increase of scale as well as the controllable resource, the compensation and reputation and the position are steady improved, which are commonly used for the managerial self-interested motivation. The investment, exceptional management, is more reluctant to be manipulated than the earning management of the operational capital. In that way, the managers are prone to exert rent-seeking investment due to the managerial discretion. The managers are positioned as the central of the management system and power, which empower themselves equivalent investment planning and managerial discretion. Therefore they probably sacrifice the investment efficiency to purse personal wealth by participating in the decision-making process. On the one hand, the compensation stickiness provide opportunities for enterprise investment inefficiency, on the other hand, the synergies between the compensation stickiness and the managerial power exacerbate the inefficient investment behavior of enterprises.Recently, constrains of managerial self-interested behavior has become a significant issue on the reform of corporate governance, property rights system and capital market among emerging markets. Thus the research on the impact of the correlation between managerial powers, compensation stickiness and enterprise investment behavior could provide valuable reference on the future motivation system and the investment activities.In this dissertation, we applied empirical research with normative research included to analysis the relevance of managerial powers, compensation stickiness and corporate investment. Specifically, we need to clarify whether the managerial powers significantly interrupt the performance sensitivity of compensation, in that way it intensifies the stickiness of managerial compensation stickiness? If managerial power has significant influence on the stickiness of compensation, whether the decreasing of compensation stickiness aggravates the agency conflict on the assets allocation instead of resolving it? Finally, whether the synergy between managerial compensation stickiness and managerial power become a joint force on the ineffective investment to the enterprises? To investigate these issues, we sampled the data of A-share listed companies in mainland China between 2005 and 2013 for detailed analysis.First, the managerial power intensifies the stickiness of compensation:(1) the power abusements of managers cannot only bring power compensations, but also significantly reduce the performance sensitivity of compensation, which results in a significant reduced effectiveness of compensation contracts. Stickiness is widely existed among the managerial compensation in mainland China, which is more prominent among the state-owned enterprises compared to the private enterprises.(2) We find that the managerial compensation sensitivity is U-shaped during the research on the structural characters of the managerial compensation stickiness. The compensation regulation enforces the inverse of the performance sensitivity of managerial compensation in optimistic environment. At the same time, the managerial power significantly lowers the performance sensitivity of compensation during bad times, which is more severe among state-owned enterprises.(3) The institutional investors who should participate in the governance are not playing an active role on the governance and operation, so that the influence of the managerial power caused by the managerial power cannot be undermined.Second, compensation stickiness exaggerates inefficient enterprise investment:(1) the stickiness of managerial compensation significantly aggravated the “wasterful” investment especially among state-owned enterprises, which indicates that the inefficient motivation system itself is intensifying the agency problem instead of resolving it. However, no evidence has showed that the stickiness of managerial compensation has significant influence on the underinvestment.(2) Compared to the negative free cash flow, the managerial compensation stickiness has stronger influence on overinvestment when the company has positive free cash flow. Within higher managerial compensation stickiness, the overinvestment have stronger influence on the firm value, which is more prominent among private-owned enterprise.(3) Although the selection on the governance of institutional investors can inhibit the positive influence of managerial compensation stickiness on the enterprise overinvestment, the applications of “selective governance” are different due to the existence of heterogeneity among institutional investors.Third, the managerial power and the compensation stickiness have significant joint force on the overinvestment. Specifically:(1) The managerial power has significant positive effect on the overinvestment of enterprise, it indicates that the managers use managerial discretion to distort the optimal strategy of enterprise, it is more significant among state-owned enterprise. The managerial power has no significant influence on the underinvestment.(2) Further study has found that the managerial power have more significant positive influence on the overinvestment of enterprise with positive free cash flow rights compared to the negative free cash flow.(3) The managerial compensation stickiness serves as the intermediary of the influence of managerial power to overinvestment to some extent. Moreover the synergy between the compensation stickiness and the effect of managerial power on overinvestment exaggerate the effect of the managerial power to the overinvestment. It interprets that the managerial power and the compensation stickiness have significant positive joint force on the overinvestment, which is commonly among the state-owned enterprise.Though deeply theoretical and empirical study, the innovations of our research are listed below:First, To eliminate the multicollinearity problems caused by the interaction from operational performance, the dummy variables represent the increase and decrease of operational performance, as well as the influencing factors, we use the method of Bu Ludan et al(2003) to calculate the compensation stickiness. By examining the effect of the managerial power on the compensation stickiness, we attempt to explore the cause of managerial compensation stickiness in detail.Second, Previous study on the effect of the compensation motivation of enterprise investment are primary towards the managerial character(Dechow&Sloan,1991), the managerial compensation motivation structure(Wang yan et al,2005), the amount of executive compensation(Xin Qingquan et al,2007), as well as the long-term share right incentive(Luo Fubi et al,2008).Since the research on the effect of managerial character towards the inefficient activity is so rare that we develop detail examination on the influence of managerial compensation stickiness on the inefficient investment of enterprise in order to provide new empirical evidence.Third, It is still controversial whether the institutional investors should position themselves as "intervention management" or "selective governance"(Li Weian et al,2008; Tan Songtao et al,2009).Therefore we involve institutional investors as the outside governance variables into the effect of the managerial power on the compensation stickiness, also the research on the compensation stickiness towards enterprise inefficient investment. By detail analysis of the relationship between institutional investors and enterprise governance, we provide solid empirical evidence on the external governance system of enterprise.