Private Equity Investment And Executive Compensation Contract

In recent years,with the increasing domestic capital market activity,China's private equity investment has gradually grown,and its positive role in corporate governance has become more and more prominent.It has become an important corporate governance mechanism to adjust organizational structure.With the introduction of social network theory into corporate behavior and financial market,the study of social network relationships among different entities in capital market has attracted more attention from scholars.And social network relationships between different entities are important for corporate governance.At the same time,the relationship between private equity managers and executives of invested companies can't be ignored.Private equity managers are influenced by the behavior of company executives to change their preferences and decisions when participating in company-management decisions.The decision-making is based on a dynamic interpersonal interaction.That is social network relationship between the private equity investment managers and executives of the invested company,which can affect corporate governance issues.Although the existing literature has conducted in-depth discussion on the impact of private equity investment and the impact of social network relationship between different entities on corporate governance,and form a relatively systematic theoretical analysis framework and research ideas.However,there is little literature,discussing the impact of social network relationship between managers of external agency and the executives of invested companies on corporate governance from the individual level.Moreover,the development of China's private equity investment,the regulatory environment and the capital market in which it is located,are quite different from those of overseas private equity investment.The differences in cultural environment also make the starting point of the application of social network theory from the power network relationship to the human network relationship.Therefore,based on China's market environment and cultural background,this paper will proceed from the social network relationship between managers of private equity investment and the executives of the invested companies,and studies the impact on the executive compensation contract.At the institutional level,private equity investment,as an active external institutional investor,can improve corporate governance by influencing incentives.But at the individual level,the characteristics of private equity managers may cause the positive effects of private equity investments to be affected.The social network relationship strengthens the synergy between managers and the executives of the invested companies,which is beneficial to both parties to reduce information asymmetry and enhance incentives for executives,as well as to generate an adverse effect on compensation through partiality and collusion.Therefore,this paper establishes the opposite hypothesis and empirically proves that this kind of social network relationship increases the compensation level and reduces the sensitivity of compensation performance,thus affects the level of corporate governance.Different from the foreign cultural background of power obedience,China is a society that compensation concerns human relationships.As a node in the social network,private equity managers are influenced by their social networks.However,because of the differences in historical background and cultural traditions at home and abroad,China's social network tends to focus on the relationship between Confucianism and humanity rather than the class relationship of power obedience.Therefore,the social network relationship between the private equity investment manager and the executives of the invested company increases the compensation level and reduces the sensitivity of the compensation performance,and also weakens the governance role of private equity investment as an active external institutional investor to a certain extent.This paper selects 857 samples of 495 companies with private equity invested listed in the initial public offering of domestic A shares in 2006-2016.Based on China's special institutional environment and cultural background,this paper discus the impact of the social network relationship between the managers of private equity investment and the executives of the invested companies on their compensation level and sensitivity of compensation performance.Further research shows that if private equity has a domestic background,a state-owned background,or the invested company has more private equity investors,the social network relationship is more likely to reduce the sensitivity of the compensation performance.The results show that social network relationship in PE-invested companies will increase the compensation level and reduce their sensitivity of compensation performance.And as the amount of social network relationship increases,the compensation level have no substantial change but the sensitivity of compensation performance will decrease.When there is a social network relationship between the private equity investment's managers and the executives,the two parties may collude to reduce the supervision intensity of the private equity investments' managers.Furthermore,China is a society that pays attention to human relationships.As a network node,the manager is in the social network relationship with the executives.They are influenced by the social network,and have the motive and willingness to favor the behavior of the executives and weaken the effect of private equity investment as active institutional investors.Then corporate governance is affected.The contributions of this paper are mainly as follows:(1)The existing literature on the social network relationship between different entities in the capital market on economic business,mainly concentrated among the executives within the enterprise,between investment institutions outside the firm.This paper expands the research on the social network relationship between different entities by studying the social network relationship between managers of private equity and executives of invested companies.(2)Compared with Europe and the United States,China's social network relationship is greatly influenced by Confucian culture,and tends to be related to human relations rather than power.This paper studies PE managers and invested companies based on China's special institutional environment and cultural background,and enriches the literature on social network relationships.(3)Previous literature has examined the impact of private equity investment on corporate governance at the institutional level,and this paper delves into the specific characteristics of private equity managers at the personal level,that is,the social network relationship between the private equity investment manager and the executives of the invested company,and enriches the relevant literature by discuss the influence of the social network relationship on the executive compensation contract.