The Relation Between The Subsidiary Autonomy And Executive Incentives Effect

In order to mitigate the agency problem between shareholders and managers, shareholders incentives the executives based on company performance. According to the observation of listed companies sample in China, we find listed parent companies show increasing equity control characteristics, presented as:The parent company’s operations gradually sinking to the subsidiaries, and weakening their own production activities. Subsidiary is independent legal entity. And because of the difference of operating activities and geography between the parent company and subsidiary, the managers of parent company are difficult to determine the subsidiaries operating performance directly. Downwards equity investment would bring about double agency of shareholders-CEO-subsidiary manager, and then interact with the executives incentives.When considering executive incentive factors, existing literature mainly studied the effect of company size, governance structure and management tenure on executive incentive levels and structure. And they examined incentive effects from firm value and investment behavior. Few studies involved the relationship between downwards equity investment structure and executive incentive of listed companies. On condition that equity investment be the main asset of a parent listed company, changes of business structure would induce decision-making autonomy of the operation transferring from the hands of the parent company executives to the subsidiaries executives gradually. Therefore, this paper identify the distribution characteristics of the decision-making autonomy brought by the company’s business restructure, and study the influence of subsidiary autonomy to the incentive effect of equity control company from the agency perspective.According to the optimal contract theory, an effective executive incentive should be linked with controllable outcome. The influence on corporate performance of executives of equity-controlled parent company depends on the autonomy of subsidiary executives. Accordingly, the evaluation accuracy of the integrated performance in executives behavior of parent company also dependent on the corporate decision concentration. On the other hand, as the decentralization of operations, the parent company mainly engaged in capital allocation, and the allocation efficiency take longer to appear, causing change of the long term incentive effectiveness of the parent company. The arrangements of incentives structure need to be reconsidered.The results suggest that:①executive bonus based on integrated performance can’t improve the performance of company with high delegation of authority, and with the increase of the degree of long-term equity investments to subsidiaries, the effect of executive bonus get to be worse;②equity incentive effect for low subsidiary autonomy company is remarkable, but the effect for high subsidiary autonomy company is up to the type autonomy formed. For diversified high subsidiary autonomy company, the parent company executives equity incentives will lapse;③the positive role of equity incentives for equity control companies is as strong as non-dominant long-term equity investment companies. The design of incentive contracts should allow for the autonomy characteristics.Innovation:①existing study of basic for compensation incentives mostly from the integrated perspective, compare the effectiveness of performance-pay between accounting performance and market performance; we explore the endogenous effects of operation autonomy allocation to executives incentives.②the study of relation between executive incentive and internal capital allocation efficiency for diversified company remain in the theoretical model level.By comparing the differences of earnings persistence between integrated performance and the parent company’s performance, we test the role of executives incentive on internal capital allocation efficiency indirect and expanding the financial research of group firm.Our contributes:①This study provides a clarity empirical evidence of the relationship between subsidiary autonomy and executive incentives;②The findings are of great practical significance to the design and supervision of incentive system for equity control of parent-subsidiary listed company.