Risk, Performance and Executive Compensation: A Simultaneous Approach on China Listed Firms

Abstract

Corporatization and listing of State Owned Enterprises (SOEs) and the adoption of profit objectives is meant to accelerate growth and encourage innovation and investment. This study assess the relation between executive incentives, risk-taking and firm performance. I applied three-simultaneous-equation using 3 Stage least Square (3SLS) method in which vega, delta and firm risk/performance are all treated as endogenous variables and are jointly determined. I find positive relationship between CEO compensation and performance. Moreover, empirical results show that vega is an incentive compensation measure that encourage managers risk-taking behavior, while delta is party of compensation that could align the interests between firm and shareholders. This study is an innovative study to foster a better understanding of compensation structure in China and has important implications for China’s current privatization reforms.