The Nonlinear Relationship Between External Pay Gap Of Top Management And Investment Efficiency

Serious inefficient investment problems exist in China's listed companies.Top management are the important decision makers of the company.Compensation contract is an important incentive mechanism to solve the agency problem between shareholders and managers.With the rapid development of China's economy and the continuous innovation of managers' compensation system,top management's pay varies widely among industries.In order to adjust the unreasonably high and excessive incomes of top management of state-owned companies,the reform plan of the compensation system for heads of centrally managed companies,which was officially implemented on January 1 in 2015,has made institutional constraints on the compensation of top management in state-owned companies.In spite of this,external pay gap of top management in China's listed companies is still large.In reality,individual behavior is usually closely related to fairness preference.When people focus on their own income,they are also very concerned about the income gap with others.The disclosure of top management compensation information in China's listed companies enables top management to know the compensation levels of other companies.Top management forms their own cognition of whether the compensation is fair or not by comparing with the compensation of their peers,so as to adjust their management behavior,and then affect investment efficiency.It can be seen that external pay gap of top management will directly affect the managerial behavior of top management,thus affecting investment efficiency.For this reason,this paper takes listed companies in China from 2009 to 2016 as the research object to study the nonlinear impact of external pay gap of top management on investment efficiency.To be specific,first of all,on the basis of elaborating the relevant theories of external pay gap of top management,principal-agent theory and information asymmetry theory,this paper analyzes the influence mechanism of external pay gap on investment efficiency from the theoretical level,and establishes a theoretical analysis framework of external pay gap of top management and investment efficiency.Secondly,by introducing the quadratic term of external pay gap of top management,the paper investigates whether there is an inverted "U" type relationship between external pay gap and investment efficiency.Moreover,the threshold panel model is used to analyze the structural break point of the threshold variable(external pay gap).Then,using the piecewise regression principle,the paper discusses the asymmetry of the influence of external pay gap of top management on investment efficiency.Finally,the structural break point of external pay gap of top management is taken as the grouping basis.This paper studies the influence of top management's ability and environmental uncertainty on the relationship between external pay gap and investment efficiency on both sides of the structural break point of external pay gap.The main research contents and conclusions of this paper are as follows:Firstly,there is an inverted u-shaped relationship between external pay gap of top management and investment efficiency.The paper takes the average pay of top management as the reference point and empirically examines the nonlinear influence of external pay gap of top management on investment efficiency by using two kinds of nonlinear regression methods.First of all,this paper adopts the method of directly adding the quadratic term of external pay gap in the econometric model.The result shows that there is an inverted u-shaped curve between external pay gap and investment efficiency.Then,with the total return on assets as the dependent variable,the threshold panel model is used to determine the structural break point of the incentive effect of external pay gap of top management.The research finds that external pay gap of top management in China's listed companies on average is not too large,but too small.Finally,the principle of piecewise regression is used to investigate the interval effect of external pay gap of top management on investment efficiency.The results show that the incentive effect of external pay gap has obvious threshold characteristics.When external pay gap reaches the critical value(2.6458),the incentive effect of external pay gap on the company's top management reaches the maximum.However,when external pay gap exceeds the critical value,the incentive effect of external pay gap presents a law of marginal decline,and the promotion effect of external pay gap on investment efficiency becomes weak.Secondly,on both sides of the structural break point of external pay gap,the influence of top management's ability on the relationship between external pay gap and investment efficiency is different.In this paper,the structural break point(threshold value)of external pay gap is used as the grouping basis.External pay gap of top management is divided into two parts: external pay gap of top management is less than the threshold value(low gap interval)and external pay gap of top management is greater than the threshold value(high gap interval).On this basis,the paper studies the influence of top management's ability on the relationship between external pay gap and investment efficiency,and it draws some conclusions.Firstly,on both sides of the structural break point of external pay gap,there is a significant difference in the influence of top management's ability on the relationship between external pay gap and investment efficiency.Specifically,the ability of top management strengthens the role of external pay gap in promoting investment efficiency in the low gap interval but the influence of top management's ability on the relationship between external pay gap and investment efficiency is not significant in the high gap interval.Secondly,by dividing the full sample into overinvestment subsample and underinvestment subsample,it is found that in the low gap interval,top management's ability enhances the inhibiting effect of external pay gap on overinvestment,while top management's ability has no significant influence on the relationship between external pay gap and underinvestment,and in the high gap interval,the influence of top management's ability on the relationship between external pay gap and underinvestment(or overinvestment)is not significant.Finally,due to the differences in the development degree of the manager market in companies of different ownerships,further analysis shows that in the low gap interval,the strengthening effect of top management's ability on the relationship between external pay gap and overinvestment is mainly reflected in non-state-owned companies,while it is not significant in state-owned companies.Thirdly,on both sides of the structural break point of external pay gap,the influence of environmental uncertainty on the relationship between external pay gap and investment efficiency is different.In this paper,the structural break point(threshold value)of external pay gap is used as the grouping basis.External pay gap of top management is divided into two parts: external pay gap of top management is less than the threshold value(low gap interval)and external pay gap of top management is greater than the threshold value(high gap interval).On this basis,first of all,the paper studies the role of operating environment uncertainty in the impact of external pay gap on investment efficiency from the micro level.The results show that there is a significant difference between the impact of operating environment uncertainty on the relationship between external pay gap and investment efficiency on both sides of structural break point of external pay gap.To be specific,operating environment uncertainty strengthens the role of external pay gap in promoting investment efficiency in the low gap interval.However,operating environment uncertainty weakens the incentive effect of external pay gap on investment efficiency in the high gap interval.By dividing the full sample into overinvestment subsample and underinvestment subsample,it is found that in the low gap interval,operating environment uncertainty strengthens the inhibiting effect of external pay gap on overinvestment and underinvestment,and in the high gap interval,operating environment uncertainty weakens the inhibiting effect of external pay gap on underinvestment,but has no significant influence on the relationship between external pay gap and overinvestment.Then,the impact of economic policy uncertainty on the relationship between external pay gap and investment efficiency is studied from the macro level.The results show that there is a significant difference between the impact of economic policy uncertainty on the relationship between external pay gap and investment efficiency on both sides of the structural break point of external pay gap.Specifically,economic policy uncertainty weakens the incentive effect of external pay gap on investment efficiency in the low gap interval.However,economic policy uncertainty has no significant influence on the relationship between external pay gap and investment efficiency in the high gap interval.By dividing the full sample into overinvestment subsample and underinvestment subsample,it is found that in the low gap interval,economic policy uncertainty weakens the inhibiting effect of external pay gap on overinvestment,but it strengthens the inhibiting effect of external pay gap on underinvestment.The contributions of this paper are as follows:Firstly,a theoretical analysis framework is constructed to analyze the impact of external pay gap on investment efficiency.Based on social comparison theory and managerial power theory,this paper analyzes the nonlinear influence mechanism of external pay gap on investment efficiency from the theoretical level,and proposes a theoretical analysis framework for the impact of external pay gap on investment efficiency.It enriches the theoretical framework between external pay gap and investment efficiency under agency conflict and information asymmetry.Secondly,it is the first to use the threshold panel model to investigate the asymmetry of the incentive effect of external pay gap on investment efficiency on both sides of the threshold value.It is a valuable attempt in research methods.Previous research mainly studied the impact of the external pay gap on investment efficiency from a linear perspective.This paper uses the threshold panel model to study the impact of external pay gap on investment efficiency.The design of the model is more reasonable and the conclusions are more accurate.This paper not only provides empirical evidence for the mechanism of the effect of external pay gap on investment efficiency,but also provides a new perspective for the study of the relationship between external pay gap and investment efficiency.Thirdly,it is found that on both sides of the structural break point of external pay gap,the influence of top management's ability on the relationship between external pay gap and the investment efficiency is different.The existing related literature mainly focuses on the background characteristics of managers,ignoring the difference in the ability to best reflect top management heterogeneity.In this paper,the structural break point of external pay gap is used as the grouping basis.The paper studies the role of top management's ability in the impact of external pay gap on investment efficiency among different external pay gaps.It clarifies the internal mechanism of the influence of top management's ability on the relationship between external pay gap and investment efficiency.And it deepens the research on the compensation incentive mechanism of top management.Fourthly,it is found that on both sides of the structural break point of external pay gap,there is a difference in the impact of environmental uncertainty on the relationship between external pay gap and investment efficiency.Previous research on the relationship between external pay gap and investment efficiency ignored the impact of environmental uncertainty on the relationship.However,in reality,investment decisions of companies are usually made under uncertain conditions.In this paper,the structural break point of external pay gap is used as the grouping basis.From the micro level and the macro level,the paper studies the role of environmental uncertainty in the impact of external pay gap on investment efficiency between different external pay gaps.It reveals the influence mechanism of operating environment uncertainty and economic policy uncertainty affecting the relationship between external pay gap and investment efficiency.At the same time,it provides evidence support for companies to use compensation incentive measures to curb the inefficient investment caused by environmental uncertainty.