Debt,Financing Constraints,and Executive Compensation

The implementation of the economic catch-up strategy has formed a bankingoriented financial system in China and has restrained the financial market for a long time.This economic strategy,while promoting rapid development of economy,has also caused the problems of excessive leverage in non-financial companies and difficulties in financing and high financing costs for private enterprises,which cannot be fundamentally resolved in the short term.In this context,how to take measures to meet these challenges has become an urgent problem.As an important part of modern corporate governance,executive compensation has a direct bearing on management and development in every regard.In case of prominent debt issues,it is worthy of further exploring how to design a reasonable compensation contract to deal with it and therefore promote the healthy development of enterprises.This paper takes private companies listed on A share during the period from 2006-2018 as the subject.Based on the literature review at home and abroad and by using the theoretical analysis and empirical research methods,this paper studies the influence of debt with different sources and maturities on the compensation contracts of executive,as well as the regulatory role of financing constraints.The result shows:(1)the increase in trade credit not only reflects the size and strength of a company,the social resources owned by senior executives,but also brings debt risks to a company.Therefore,cash compensation of executives will increase with the increase of trade credit for the purpose of incentivizing executives' working enthusiasm,acquiring talents with scarce resources,and risk incentives.Unlike cash compensation,equity compensation will exposes executives' wealth to risks when plays the role of mitigating agency conflicts,talent retention,and risk incentives.The effect of executive equity compensation is marginally diminishing.It first increases and then decreases with the enlarging of trade credit scale,showing an “inverted U” relationship.However,most observations in the sample are located on the left side of the turning point,which shows a positive effect of decreasing margins in whole(2)the equity compensation of executives will first increase and then decrease as the proportion of short-term loans in bank loans increases,presenting an "inverted U" shape.Different from trade credit,it is the result of the tradeoff between the risk incentives of executives and debt agency conflicts.Therefore,most of the observations in the sample are located on the right side of the turning point,which shows a negative effect of marginal increase.Executive's cash compensation is subject to the constraints of banks,which decreases with the increase in the proportion of shortterm loans in bank loans;Long-term loans provides financial support for the company but is less binding.Shareholders(board)will set up a compensation contract to reduce the opportunistic behavior of senior executives.Therefore,the equity compensation and cash compensation of executives will increase as the proportion of long-term loans in bank loans increase.(3)Considering the regulatory effect of financing constraints,this paper finds that financing constraints weakens the positive effect of trade credit on equity compensation on the left side of the turning point,promotes the negative effect of trade credit on equity compensation on the right side of the turning point,and also promotes the positive impact of trade credit on cash compensation;In terms of bank loans,Financing constraints weakens the impact of short-term and long-term loans on executive compensation.On this basis,relevant suggestions are proposed in order to provide decision-making reference for enterprises and relevant functional departments.