Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is to explore the effectiveness of compensation contracting based on the specific responsibility of executives. More specifically, this paper is to examine whether high compensation is helpful to mitigate agency problems.
Considering that board secretaries of listed companies are responsible for information disclosure in China, this paper examines the effect of board secretaries’ excess compensation on firms’ disclosure quality using listed company data from 2007 to 2015. The first measure of disclosure quality is based on the disclosure violation behavior of firms, and the second is KV value that represents the extent to which the investors relay on the stock trading volume. To provide additional confidence that the findings are robust, this paper further conducts two indirect tests based on rumors and cost of equity capital.
The results show that board secretaries’ excess compensation is negatively associated with the probability of information disclosure violation and also negatively associated with firms’ KV value, suggesting firms that pay high compensation to their information providers are more likely to provide high-quality disclosures. Besides, this paper further finds that board secretaries’ excess compensation is negatively related to the incidence of rumors, the number of rumors incurred or the cost of equity capital.
Overall, the findings provide support to the efficient contracting of executive compensation, which implies that highly paid board secretaries would be better information providers than those poorly paid.
This paper provides empirical evidence that firms’ disclosure quality can be improved by modifying the compensation contract of information providers. This may indicate a new way to improve the quality of disclosures, so as to mitigate the agency problem.
In spite of the public criticism on executive excess compensation, the high compensation is not always a signal of manipulation, collusion and self-interest. It also can be a signal of individual talents and great efforts. Board secretaries are worth to be highly paid if they can improve firms’ disclosures, thereby reducing the incidence of rumors and reducing the cost of equity capital.
This paper is the first research to examine the effectiveness of compensation contracting based on information providers’ disclosure responsibility in the Chinese context. It documents a positive relation between board secretaries’ excess compensation and corporate disclosure quality.
The authors appreciate the support of the National Natural Science Foundation of China (Grant No. 71672152; Grant No.71372206) and the Fundamental Research Funds for the Central Universities (Grant No.JBK140501; Grant No.JBK1707196).
Peng, Q., Tang, X. and Zheng, Y. (2019), "The impact of board secretaries’ excess compensation on corporate disclosure quality", Nankai Business Review International, Vol. 10 No. 2, pp. 306-340. https://doi.org/10.1108/NBRI-05-2017-0027
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