Effect Of Senior Managers’ Reputation In Chinese Listed Companies

In the modern enterprise system, corporates’separation between their ownership and management is the most prominent feature. That the goals and interests are inconsistency between shareholders and managers coupled with asymmetric information make the agency problems. The agency problem includes two aspects. On the one hand, the moral hazard problem of managers is getting worse. The self-interested behavior of some managers is getting worse and it damages the interests of shareholders. And shareholders due to asymmetric information can not bind it by contracts. On the other hand, because the managers in the company make course-specific investments and shareholders cast non-specific investments, managers will be locked in a trading relationship with shareholders (high switch cost). Since the contract is incomplete, the managers who make specific investments face the risk of hold up in the subsequent re-negotiation process. Anticipated this risk, managers will reduce their investment, and it may lower total social output. This is the agency problem. As companies expanding and business increasing, agency problem becomes more increasingly apparent. Therefore, constructing the incentive mechanism of the managers’ especially senior managers’ has become the urgent need to solve the problem. Especially in recent years, degree of economic globalization increases yearly. Competition in the market increases yearly. People pay more attention to social responsibility and business ethics. All these make reputation become the focus of attention. During the manager’s incentives, reputation is believed to a hidden, long-term effective incentive mechanism and can alleviate the principal-agent problem.In the dynamic game model of agent theory, if the agency relationship is an infinitely repeated game, when both players have enough patience, the game relationship can achieve a Pareto optimal order of risk-taking and incentives. During the direction of the long term, law of large numbers will eliminate all exogenous uncertainty. The principal can accurately infer the agent’s real effort level from a number of variables. In other words, in the long run, the agent could not hide his lazy behavior. Out of consideration for their own professional reputation, agents will work harder. In addition, because the agents face competition in the job market, managers are not only interested in their monetary income of the company, they may also be interested in other aspects, especially those which can help they add their advantage when they face quit or promotion opportunities. Therefore, the reputation incentives can play a role in mitigation principal-agent problem.This study first summarizes and sums up the basic theory research of reputation. On this basis, we reviewed the reputation incentive for executives. After examining China’s senior managers’reality reputation incentive, combined with the actual situation, we chose the senior managers who have got a media reputation incentive in listed companies from2000to2010as our research sample.Taking announced awards of media as executives’positive reputation incentives, we test the effect of reputation incentive. Through the data regression test, we find that the reputation of senior managers played a role in both compentation and corporate performance improving. We believe that with the continuous development and improvement of Chinese professional managers market, people’s reputation competition awareness growing, top managers are paying attention to stimulating their reputation. Overall, after getting a positive reputation incentive, the professional competence of senior managers is accepted by the society. They received an improved monetary reward. At the same time, the performance of the company is increased. On further research, the managers’effort degrees and directiones are different under the different ownership structure arrangements. Specifically, the main conclusions drawn in this study are:Firstly, from the overall perspective, a positive reputation incentive of executives can help to improve the operating performance of listed companies. In terms of both agency cost and agency efficiency the two aspects, although reputation incentives can not reduce agency costs significantly, they can improve agent productivity significantly. The Executives of listed companies will not reduce job consumption and conspicuous consumption in order to maintain the reputation after obtaining reputation but they they will work harder to improve business efficiency. Thereby they will improve business performance. In other words, reputational incentives can "open source", but not "cutting."Secondly, the reputation incentive effects of senior managers partly through pay incentives. Company executives, especially those in private enterprises obtain more monetary compensation. The improvements of the level of monetary compensation incent managers to work harder and then improve the agency efficiency of the companie. So we can say that, reputation as an implicit incentive mechanism is difficult to play an independent role without corporate governance internal mechanisms such as dominance pay incentives and appointment.Thirdly, the ultimate control rights have a significant impact over the effect of the reputation incentives. State holding company’s reputation incentive effect and the private holding company’s reputation incentive effects show different characteristics. Specifically, in the state-owned company, the reputation incentives can not improve the senior managers’remuneration due to executive compensation control. Remuneration control led the executives who won the reputation do not cut but increase consumption and extravagant job waste. So the agency costs are increased. In the private owned company, the senior managers get more compensation after they got a reputation and the improvement of compensation make the managers improve agency efficiency.The main contribution of this study is reflected in the following three aspects:First, we discovered the intermediary role of compensation incentive during the effect of reputation incentive on corporate performance. A lot of researches are conducted for managers’incentives and many scholars pay attention to and study the compensation incentive, including monetary compensation and job consumption. But scholars pay little attention to another incentive mechanism and that is the implicit incentive. Reputation is one kind of incentive mechanism that is implicit and takes part in constraint. In recent years, some scholars began to conduct research on the reputation incentives, but they did not combine explicit and implicit Incentives. One outstanding contribution of this study is that we combine the implicit and explicit incentives in the analysis of the incentive effects of executives’reputation. In the process, we derived and verified the intermediary role of compensation incentive in the process of reputation incentive.Second, we have a deep study of the microscopic mechanism of reputation. We study the reputation effects from agency costs aspect and agent efficiency aspect. We study not only the reputation incentive effects of senior managers but also the microscopic mechanism of reputation. The study about the relationship between the explicit and implicit incentives provides a new perspective for top managers’ motivation.Third, the study adopts some new research methods. From the theoretical study and literature at home and abroad, we can see that, the theoretical analysis of senior managers’reputation in listed companies is often very complicated because of many exogenous factors. In the context of Chinese Special system, the exogenous influence is more prominent in listed companies. Government intervention, multidimensional objectives, and the complexity of the agency are the most typical features. All these make the factors and effects of the senior managers’reputation in listed companies very complex. This study overcome the small sample bias and sample selection bias problem through a new research method namely propensity score matching analysis.