Research On The Effect Of Separation Of Cash Flow Rights From Control Rights On Executive Compensation And Perks

Optimal contract theory and managerial power theory aiming to theory problem between the owner and agent have been widely used to explain the change of executive compensation and perks. However, many companies have concentrated ownership in China, so it is common for ultimate controlling shareholder to expropriate the benefits of minority shareholders. Such an expropriation rooted in the separation of cash flow rights from control rights had been proved. To expropriate successfully, ultimate controlling shareholders possibly seeks to cooperate with executives, which causes the improvement on executive compensation and perks. The deeper in separation degree of cash flow rights from control rights, the more likely ultimate controlling shareholder cooperate with executives, as a consequence, executives are paid higher and provided more perks, and such a possibility will decrease because of growing cash flow rights of ultimate controlling shareholders. Besides, China State-owned listed company where perks is very common, however, paying higher is favored by private listed firms because of extraordinary compensation in itself. The article used data from the 2007-2014 annual reports of Chinese listed company in A-share markets of Shanghai and Shenzhen and measured the separation of cash flow rights from control rights in the ratio of cash flow rights to control rights to study. It turned out that the ratio was negatively related to executive compensation and perks, the former was same with that in SOEs, the latter also appeared in private firms. Moreover, the ratio was negatively related to compensation and perks in group of small cash flow right but such relationship was not clear in group of big cash flow rights, which indicates that ultimate controlling shareholders probably cooperate with executives causing that compensation and perks are increased for expropriating the benefits of minority shareholders, however, when cash flow rights become big, they are unlikely to cooperate with executives for expropriation. The conclusion of this article is a discovery in the study of ultimate controlling shareholder’s expropriation of the benefits of minority shareholders and management compensation contract, and gives a reference to the practice of corporate governance.