The Effect Of Executive Compensation On The Insider Trading

The compensation contract is an important mechanism to realize the incentive between the shareholders and the executives.The lack of incentive will lead the executives to use the internal information of the company to obtain the excess profits.With China's deepening financial reform and rapid economic development,the salary gap in the company's internal executive team and the salary gap between the various industry executives gradually widened."Company Law of the People's Republic of China" in 2006 make insider trading possible.After that,there are increasingly frequent behaviors of executives,trading profit increased rapidly,which causes widespread concern in the community.So what is the effect mechanism of the compensation contract on the behavior of the executives and the transmission path of the listed companies and the effect of the remuneration contract on the behavior of the executives?In this paper,using the private listed companies as the research sample,focusing on the effect of level of executive compensation and the internal and external pay gap on the choice of executive behavior mechanism.We study how the salary level and salary structure influence the timing of executive transactions and profitability and how the external governance mechanism has an impact on the effectiveness of the pay contract.The study of the relevant literature at home and abroad shows that the above problems still need to be further studied.In the first place,the literature on executive behavior effect of salary contract focuses on the study of individual behavior of executives,while the research on executive team behavior is insufficient.Secondly,the existing literature focuses on the effect of salary contract on corporate performance and corporate behavior,which is an indirectly speculation of the impact of the salary contract on the behavior of the executive,which lacks direct evidence of the impact of the compensation contract on the executive behavior.Finally,the literature on the incentive role of the compensation contract on the excutive behavior fails to consider the institutional environment factors,the legal environment,the degree of market development and the flow of social talents will all have an impact on the incentive effect of the compensation contract.Based on the basic research paradigm of principal-agent theory and information asymmetry theory,this paper constructs the salary level,salary internal gap and salary external gan of the salary system analysis mechanism by using the tournament theory,behavior theory and manager's market theory.This paper builds the effect mechanism of the compensation contract on the executive trading:the effect level of the executives,the internal and external pay gap,the internal and external governance mechanism of the company jointly determine the implicit remuneration expectation of the executives.Then we put the implicit remuneration expectation and the real salary level into the incentive compatibility model analysis,which explains the choice of executive trading behaviors.Through theoretical analysis and mathematical formulas derivation,the following propositions are put forward:First,the lack of incentive compensation is an important reason for the behavior of executives trading.Enterprises need to adjust the executive compensation according to the development of the company to form an effective incentive to achieve the rational allocation of enterprise resources and to improve the efficiency of the use of enterprise resources.Second,the psychological perception of internal and external pay gap will affect executives' trading behavior.The enterprise salary system design needs to consider the factors such as fairness perception and competitive incentive.Thirdly,the choice of executive trading behavior is influenced by the efficiency of market information transmission and the internal and external environment of the transaction.Therefore,it is an important means to set up a reasonable salary system and create good internal and external environment.Based on the above theoretical analysis,this paper uses the data of executive pay and executive transaction of private listed companies from 2010 to 2014,and studies the effect of salary contract on executive behavior and team transaction behavior by econometric model,and further analyzes the direction of executive transaction,whether the senior management of the transaction,the duration of the transaction and other factors'influences on the incentive effect,and then we analyze the adjust effect of internal and external governance mechanism on the compensation effect.The important conclusions of the empirical test are summarized as follows:First,the effect of the pay contract on the personal transaction of executives.The level of pay is positively related to the short-term timing ability and profitability of executives,and is not related to the long-term timing and profitability of executives.The higher gap between the executive pay level and the company's average pay,the weaker the short-term and long-term timing and profitable ability of executive transactions,which indicates that executives with high salary will reduce their use of private information in the trading behavior.The higher the positive gap between executive pay and industry average pay,the stronger the short-term and long-term performance of executives,which indicates that executives with high external pay margins have more industry and future development information and can make accurate judgments.Thus they can better grasp the trading opportunities.Executives' short-term timing and profitability are mainly reflected in the selling behavior,while the long-term timing of profitability is mainly reflected in their buying behavior.The high level of pay has played a curb effect on the ability of the relatives of the senior management,and palys a promotion effect on the discretionary ability of the executives themselves.The internal pay gap has a positive effect on the short-term timing and profitability of the relatives of the executives,and has a negative effect on the short-term timing and profitability of the executives.The external pay gap has a deterrent effect on the ability of the relatives and has a positive effect on the ability of executives to choose their own trading time.Second,the effect of the compensation contract on executive team transactions.The increase in pay levels increases the size of the executive team's trading volume.The high the internal pay gap between the executive team and other numbers of executives in the executive team also increases the size of the executive team's trading volume.The external pay gap of the executive team helps to slow down the positive effect of internal pay gap on the trading volume.The study shows that simply raising the level of compensation for the executive team does not help to reduce the use of the company's inside information in transactions.The design of company executive team's salary system needs more consideration of the fairness.Moreover,the design of executive compensation also need to consider the company's condision,and to develop relatively high salary level to make it competitive in the industry to increase the satisfaction of team members,thereby reducing the insider trading behaviors.Thirdly,the adjusted effect of the institutional environment on the incentive effect of the salary contract.The improvement in the degree of legalization in the region can reduce the short-term and long-term timing ability and profitability of executives in the company,which has a positive effect on the inhibition effect of the executive compensation on the insider trading.The level of internal control will help the company's long-term development and make the executives' long-term ability to select time and profitability weaker.But the increased internal control level helps the executives' short-term timing and profitable ability.The improvement of regional financial development can curb the long-term ability and profitability of senior executives,but it can increase the short-term timing and profitability of executive transactions,indicating that the improvement of regional financial development can strengthen the compensation contract's long-term effect of containment on the insider trading,but increases the incentive effect on the short-term trading behavior of executives incentives.Analysts following can effectively reduce the short-term and long-term performance and profitability of executives' trading behaviors,indicating that analysts play an important role of information mining and information transmission which can effectively supervise the use of private information transactions in the capital market.Analysts following improve the credibility of the pay contract,thereby increasing the incentive of executive compensation.The research contribution of this paper is mainly reflected in the following aspects:First,we put the theory of behavior into the pay system affect the management of senior management theory framework,combined with the anchor effect and reference point effect,combined with the individual efforts to analyze the influence of internal and external pay gap on the choice of executive trading behavior.We find the effect of fairness on the salary structure of the team and the interaction between the internal and external payoffs on the behavior of the executives.Second,we establish the pay system affect the executive compensation behavior system analysis---salary level,the internal pay gap and external pay gap "three-dimensional" overall analysis framework.Respectively,we study the individual executives and executives' position in the company and the industry salary system and further research how this position affect the behavior of executives trading.Thirdly,it is the direct test of the incentive effect of the salary contract from the perspective of the behavior of the executive transaction,which makes up the deficiency of the indirect variable test through the performance of the enterprise.It can better reflect the path and mechanism influence of the salary contract on the behavior of the executive.Fourthly,it starts from the institutional environment to analyze the adjustment effect of the change of the internal and external institutional environment in the influence of the salary contract on the behavior of the executives.The conclusion of this paper provides a theoretical reference for the company to set up a reasonable and effective salary incentive system,provide policy advice for the supervisory department to guide the behavior of senior executives,and provide guidance for the government departments to improve the external environment of the company.