The Effects of Executive Incentives on Firm Performance in China the Moderating Role of Earnings Management
Li Dingzhao 1✉ Email Email
Hafizah Abdul Rahim 1
Aliana Shazma Amir Amir 1
1 Faculty of Business & Communication Universiti Malaysia Perlis Sungai Chuchuh 02100 Padang Besar, Perlis Malaysia
Li Dingzhao 1*, Hafizah Abdul Rahim 2, Aliana Shazma Amir Amir 3
1* PHD, Faculty of Business & Communication Universiti Malaysia Perlis Sungai Chuchuh, 02100 Padang Besar, Perlis, Malaysia
2 Professor, Faculty of Business & Communication Universiti Malaysia Perlis Sungai Chuchuh, 02100 Padang Besar, Perlis, Malaysia
, 3 Dr, Faculty of Business & Communication Universiti Malaysia Perlis Sungai Chuchuh, 02100 Padang Besar, Perlis, Malaysia
*Corresponding author email: dingzhao_li3@outlook.com; lidingzhao@studentmail.unimap.edu.my
Abstract
The paper breaks down executive incentives into three categories: executive salary, executive equity, and executive perks and the relationship between executive incentives and firm performance, and the moderating role of earnings management on this relationship, are discussed. It analyses panel data of publicly listed firms on the Chinese stock exchange in 2013–2023. The findings indicate that executive pay and executive equity can significantly positively affect firm performance. Conversely, executive perks are negatively associated with firm performance. Furthermore, the interrelationship among chief executive pay, executive stock, executive compensation, and company performance is moderated by earnings management.
Key words:
Executive incentives
Firm performance
Earnings management
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1. Introduction
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The main source of organisational success is firm performance, which is considered to be a reflection of how well a particular company can put its resources to the test and reach its goals (Peterson et al. 2003) It involves financial results, operating performance, and competitive strength that will jointly offer sustainability in the long run (Lee and Yang 2011) Additionally, the steady attainment of firm performance is central to growth and progress, thus being a major concern among both practitioners and researchers (Taouab and Issor 2019) China, the aspect of firm performance has played an important role, especially because the country has been developing at a high rate. The Chinese government has announced a wide range of policies in 2013–2023 to promote high-quality growth and corporate competitiveness (Ren et al. 2024) In spite of such policy initiatives, empirical evidence indicates that not all corporations listed at the Chinese stock exchange have fully exploited external support to enhance their performance (Xu et al. 2023) This disparity has prompted researchers to turn their attention on internal governance processes, especially those associated with human resources and leadership, in order to gain more insight into how firm performance may be optimised (Li et al. 2015).
Strategic decision-making and operational leadership depend heavily on executives and directly affect the success and failure of an organisation (Reutzel et al. 2016) Their action plans, style of leadership, and strategic approaches are some crucial determinants of organisational performance (Tang et al. 2022)As a result, the emphasis on executive rewards, or the mechanisms aimed at motivating and aligning the interests of executives with corporate objectives, that became central to corporate governance literature (Tang et al. 2022) Agency theory is a conceptual basis through which one can comprehend the relationship between executive incentives and firm performance. It is based on the premise that agency problems, which are conflicts of interest among managers and shareholders, may impede corporate objectives (Eisenhardt 1989)To overcome this hurdle, incentive decisions are developed to match the interest of shareholders with the behaviour of managers, thus enhancing performance of firms (Chaigneau 2017).
An example is equity-based incentives in which executives directly benefit when the corporation succeeds financially, as they are motivated to pursue strategies that help the corporation increase its long-term value (Armstrong and Vashishtha 2012) Other non-monetary rewards, like perks, also play a motivational role by providing executives with recognition and awards that help them identify purpose and dedication to organisational objectives (Kuhnen and Zwiebel 2009) But the scholars are of the opinion that perks are the other form of agency problem (Jensen and Meckling 1976) Benefits are extra, not essential costs of business operation (Li 2023) Although executive rewards have the ability to motivate firm performance, the effects are moderated by other variables, such as earnings management. Earnings management is the process of manipulating financial reporting to attain intended goals, like attaining performance standards or obtaining shareholders approval (Dechow and Skinner 2000) These practises can be short-term beneficial in terms of boosting reported financial metrics, and they frequently prove to be at the cost of transparency and long-term value (Young 2014).
The agency theory provides information on the incentives of earnings management, indicating that managers can distort financial outcomes in a manner favourable to their own interests, as opposed to the company (Ali and Kamardin 2018) Further, executive incentive and earnings management have received substantial scholarly attention. Research has indicated that executive pay could be tied to objective performance measures in order to mitigate the risk of earnings manipulation and instead promote transparency and accountability (Bebchuk and Fried 2003) Nevertheless, managers can be tempted to manipulate earnings in order to enrich themselves (Shuto 2007) Despite, there are also researches that dwell on the aspect of earnings management as a mediating variable that affect the corporate governance-firm performance (Mahrani and Soewarno 2018) Nonetheless, research gaps persist on the extent to which earnings management moderates the relationship among executive incentives and company performance, especially under distinctive lies of governance like in the China setting. The Chinese corporate governance system, which is marked by a combination of market competition and government regulation, is a potent subject to study the factors that influence executive incentives and their effects on company performance (Bin et al. 2020) Furthermore, the focus on technological innovation and science-based development by the government underscores the significance of intra-organisational governance in promoting corporate competitiveness (Pan and Wan 2020).
Mass media Due to the unique characteristics of the economic and governing frameworks in China, the moderating influence of earnings management in the correlation between executive compensation and corporate performance is a research area that is somewhat underdeveloped. The research aims to fill this gap by exploring the effect that various categories of executive rewards, such as salary, equity and perks, have on firm performance in the Chinese market. Additionally, it examines how much earnings management impacts these relationships, shedding new light on how corporate governance practises condition organisational outcomes.
The following sections in this study read as follows: Section 2 will tell how to develop hypotheses and will briefly give an overview of the existing research. Section 3 shows the data and methodology, and section 4 shows the regression results. Section 5 summarises findings.
2. Literature review and hypotheses development
In this analysis, executive pay can be segregated into three groups, namely executive pay, executive stock and executive benefits. These categories are founded on the findings of a literature and they have a different kind of relationship with firm performance.
2.1 Executive salary and firm performance
The association between executive compensation and company performance is a frequently studied topic in literature, typically with the assumption that high pay is a strong incentive that can motivate executives to boost company performance. The school of thought holds that most executives tend to deliver good performance due to their compensation being based on the attainment of corporate goals, including profitability, return on investment, and stock price appreciation A study reported a significant positive relationship between executive compensation and company performance, especially stock price performance, indicating that financial compensation can serve as an engine in executive motivation (Kato et al. 2007) U.S.-based firms, ascertained that executive compensation, notably the pay tied to firm performance measures, is eminently connected to future corporate prosperity (Frydman and Saks 2010) On the same note, the researcher pointed out a positive, definite relationship on the issue of CEO compensation and firm performance and how such financial inducements play a significant role in providing incentives to the executives to work towards organisational success (Ozkan 2011).
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Moreover, executive salaries are multi-dimensional in their determinants. The author posited that corporate size is one of the major factors affecting executive compensation, with bigger firms paying bigger packages (Sigler 2011) Also, the study believes that there is strong association between the performance of the firm and the overall compensation given to executives thus showing that the monetary reward can be used as a form of enhancing the participation of executives in the operational achievements of a firm (Sun et al. 2013) A study of small- and medium-sized firms in the stock market indicated the same correlation, and the CEO salary demonstrated a strong association with corporate value (Park and Byun 2021) Research also suggests that the role of executive pay in promoting firm performance in China is significant, with executive pay being positively associated with performance metrics including stock returns and return on assets. Despite these managerial links, it is crucial to mention that executive compensation schemes do not always positively influence long-term firm results. To illustrate, the outcome indicated that increased compensation is correlated with immediate increases in company performance, although it can lead to executives prioritising short-term profit maximisation over long-term strategic directions (Kayani and Gan 2022).
Based on prior research, the most studies tend to support a positive relationship between executive salary and firm performance. Therefore, the hypotheses of this study are as follows:
H1: Executive salary positive impact for firm performance.
2.2 Executive equity and firm performance
Executive equity, in its simplest form, is a kind of equity-based pay that has gained prominence as a tool to align business goals with shareholder interests in recent years. The reasoning behind this is based on the idea that executives with a lot of stock in the firm are more likely to do what's best for shareholders. According to research conducted (Conyon and Sadler 2001) stock-based pay has a favorable correlation with performance in UK publicly listed firms. Another research found that companies with a higher proportion of equity-based remuneration had greater performance, as executives with stock incentives were more likely to work to increase the firm's value so they could benefit from capital appreciation (Frye 2004) (Akimova and Schwödiauer 2004) state that a good financial alignment between shareholders and management is believed to improve corporate success via equity incentive schemes.
Looked at Chinese companies and found that implementing equity incentive programs significantly boosted business performance. (Lian et al. 2011) Gains in both cash flow and profit growth were the metrics used. These programs reduce agency costs and promote long-term value creation by linking executive compensation to stock performance, which benefits both shareholders and the business Regarding this idea, it is important to mention that equity-based remuneration not only harmonises the interests of both the executive and shareholders but also contributes to the elimination of the vice of managerial opportunism, which would further improve you govern and enhance operational efficiency (Aljughaiman et al. 2024) Nonetheless, state ownership may make equity incentives less effective, with state-owned companies showing less pressure to perform at high levels because of political influence or alternative organisational goals (Chen and Jia 2015) Also, the stronger the equity incentive intensity, the more executives will be interested in long-term company development, which will eventually result in its improved performance (Shengjun 2016).
The businesses also rely on equity incentives to bring about business innovation and this is one of the reasons why sustainable performance of firms in the modern business environment is largely informed by innovation (Mazouz and Zhao 2019) Conversely, in a situation where the equity-based pay framework is over-reflective of short-term stock price changes, executives can engage in more short-term risk-taking to increase stock prices in the short term, at the expense of long-term stability in the company (Bhagat and Bolton 2019) In addition, manipulation probability is augmented when the equity incentives are pegged to stock price performances, which encourages certain executives to resort to earnings management or other fraudulent activities to achieve quotas (Hass et al. 2016) Therefore, although equity-based compensation can be a powerful motivator in encouraging executives to enhance firm performance, it should be well-crafted to guarantee that it does not encourage persistent risk-taking conducts but instead sustainable, long-term value. According to the previous studies, it is observed that most studies prefer to show a positive relation between executive equity and firm performance. So, the following are the hypotheses of this study:
H2: Executive equity positive influence on firm performance.
2.3 Executive perks and firm performance
Besides salary and equity-based payment, executive benefits, including non-financial rewards, have increasingly become a significant component of the total reward package. These incentives, in many instances in the form of company-sponsored benefits like private jet travel, club memberships, or lavish healthcare plans, are intended to increase the satisfaction of executives, as well as to provide them with motivation to perform well (Chen and Liu 2019) The executive benefits may be used to complement salary and equity-based pay so that managers are motivated to work using non-monetary rewards that directly relate to the performance of the firm (Adithipyangkul et al. 2011) When examining media businesses, discovered that executive compensation, particularly performance-based pay, may be effective in increasing a firm value (Yang et al. 2023) Likewise, the responsible application of perks might aid in maintaining firm performance through the motivation of executives to stay active and engaged in their work, particularly in competitive industries (Yang et al. 2023).
However, an analysis of data about the personal use of corporate jets by American executives reveals a negative correlation between perks and stock market performance (Yermack 2006) This finding supports the argument that perks are indicative of agency costs ( The research data from the Chinese result that in order to get additional perks, executives at state corporations are motivated to deliberately suppress negative information for long periods, which subsequently increases the chance of a significant decline in stock prices in the future (Xu et al. 2014) Moreover, greater perks are associated with fewer chances for advancement, increased adverse response from the market, and decreased levels of share price information (Gul et al. 2011) Perks in a China context, including entertainment and travel fees, often have a detrimental impact on corporate efficiency (Cai et al. 2011) There is a notable inverse correlation between a corporation’s growth prospects and the extent of perks offered (Grinstein et al. 2008) The perks of business-related flights decrease firm performance (Lee et al. 2018) The excessive incentives provided to executives have a significantly negative effect on the value of the organisation throughout its decline stage (Duan et al. 2021).
Based on prior research, the most studies tend to support a negative relationship between executive perks and firm performance. Therefore, the hypotheses of this study are as follows:
H3: Executive perks have a negative impact on firm performance.
2.4 How earnings management affects the correlation between executive compensation and business success
If managers are looking for financial incentives like stock options or bonuses, they may engage in earnings management, according to and (Wenfang and Ayisi 2020) According to (Cohen and Zarowin 2010) managers may feel pressured to satisfy expectations through manipulating results, even if it compromises the development of long-term value. This is because executive compensation is based on performance. According to a study, organizations who engage in more earnings management actually end up with inferior financial performance in the long run, even though it improves their short-term outcomes (Jiraporn et al. 2008).
Consequently, organisations relying on earnings management would experience a downward performance trend as the artificial alteration of financial outcomes eventually become a drag on actual value generation (Shivakumar 2010) Additionally, the management of real-earnings outcomes can potentially enhance the temporary performance through cost reduction or revenue maximisation but tends to negatively affect the long-term profitability and growth prospects (Khuong et al. 2019).
It is difficult to ascertain the true influence of incentives such as stock options and performance-based bonuses on company performance because executives may manipulate performance measurements for their own gain Profits management also acts as a go-between when it comes to the connection between good corporate governance and how it affects performance. For instance, research has shown that the correlation between "corporate social responsibility (CSR)" and financial performance weakens as earnings management becomes more prevalent (Dianita 2011) Published works on Chinese listed companies between 2009 and 2015 provide stronger evidence connecting CSR initiatives to financial success. Profits management may hinder the expected benefits of ethical company practices, according to study (Sial et al. 2018) which in turn hurts the association.
Yet, not every study agrees on the intensity of this moderating effect, with certain studies, including those that investigated industrial corporates, showing no meaningful contribution of earnings management on the correlation between cash flow activity and stock performance (Abbadi 2020) Such mixed findings underline the multidimensionality of earnings management and imply the necessity of a more subtle approach to the interplay between executive incentives, corporate governance, and financial reporting practises to determine the performance outcome in the firm. Empirical studies often use earnings management as a moderating factor, especially in areas connected to corporate governance and firm performance. Hence, the essay presents the following hypothesis:
The relationship between CEO compensation and company success is moderated by earnings management (H4).
Executive equity and business performance are moderated by earnings management, according to Hypothesis 5.
• Hypothesis 6
• The relationship between executive rewards and company performance is moderated by earnings management.
3. Data and method
3.1 Data and simple
Data used to build this study's model came from secondary sources, namely financial records of Chinese companies traded on the Shanghai and Shenzhen A-share markets between 2013 and 2023. The primary resource for Chinese company financial data is the “China Stock Market Research Database,” or “CSMAR.” Companies whose financial reports have been determined to have abnormalities by the "China Securities Regulatory Commission (CSRC)" publishing are not included in this article. The study's sample includes 10,988 businesses that meet the inclusion requirements and provide panel data. The regression findings were also made more robust and less vulnerable to severe outliers by minorizing all variables at the 1% and 99.99 percent levels. The second stage of data selection involves removing equities and financial organizations that do not specialize from the dataset.
3.2 Measurement
Dependent variable: firm performance
Sometimes the previous study used ROE and ROA to measure the firm performance (Jha and Kumar Mittal 2024). Hence, this study will following the previous research, choice ROE to measure the firm performance, and robustness test will use ROA to measure the firm performance.
Independent variable: executive incentive
In the previous paragraph, there are three variables pertaining to executive incentives: executive salary, executive equity and executive perks.
(1) Executive salary (salary): the natural logarithm of the top three executive compensation (Wang et al. 2021).
(2) Executive equity (equity): executive shareholding divided by total shares (Wang 2022).
(3) Executive perks (perks): in China, companies do not disclose data on executive perks in their financial statements. Therefore, administration expenses can be used to indirectly describe executive perks. However, administration expenses include executive compensation and amortization of intangible assets, which are clearly not perks. Therefore, in this study, executive perks are administration expenses minus executive compensation and amortization of intangible assets divided by operating income (Bo et al. 2022).
Moderating variable: earnings management
The “real earnings management (REM)” framework, which follows (Roychowdhury 2006) The data outcomes meet CSMAR’s Accounting Information Quality (AIQ) requirements. Focus on REM’s absolute value as well, since it truly depicts the degree of corporate earnings management.
Control variables
Drawing from the findings of previous research, control variables are selected and measured, which include firm size (size), leverage (lev), ownership concentration (top), the ratio of independent directors (idr), non-debt tax shield (ndts), asset tangibility ratio (tr), state ownership (state) and firm growth rate (gr) The specific measurement and calculation methods for these variables are presented in Table 1.
Table 1
Variable Measurement
Variable
Abbreviation
Measurement
Firm performance
Fiperf
Net Profit divided by the average shareholders' equity balance
Executive salary
salary
Natural logarithm of the total salary of the top three executives
Executive equity
equity
Ratio of executive shares to total shares
Executive perks
perks
(Administrative expenses − total executive salary − intangible asset amortization) divided by operating income
Earnings management
REM
The absolute value of real earnings management, sourced from the CSMAR database
Firm size
size
Natural logarithm of total assets
Leverage
lev
Total liabilities divided by total equity
Ownership concentration
top
Proportion of shares held by the largest shareholder
Ratio of independent directors
idr
Proportion of independent directors within the board
Non-debt tax shield
ndts
Depreciation and amortization divided by total assets
Asset tangibility ratio
tr
Ratio of total tangible assets to total assets
State ownership
state
Equals 1 if the company is state-owned, otherwise 0
Firm growth rate
gr
Annual growth rate of operating revenue
3.3 Methodology
In order to mitigate the influence of years and businesses on the regression findings, this study used a two-way fixed-effect model. To address potential issues such as serial correlation and heteroscedasticity, robust standard errors are pooled at the business level as well. The following three assumptions will be empirically tested using this regression model (1):
1
If the salary and equity regression coefficients are found to be positive, it would confirm hypotheses H1 and H2, that is, that there is a positive and statistically significant relationship between executive compensation (salary and equity) and business performance. Alternatively, we want a negative and statistically significant regression coefficient for perks in order to test hypothesis H3. If this is the case, then executive perks are correlated negatively with company success.
Furthermore, to test hypotheses H4, H5, and H6, the following regression model (2) is utilized:
2
To prevent issues with multicollinearity, the interaction terms in this model are mean-normalized (Haans et al. 2016) A large coefficient of the interaction term indicates that earnings management influences executive incentives (salary, stock, and bonuses) and company success. Specifically, it is anticipated that the impact of executive incentives on firm performance would increase with higher levels of profits management, so H4, H5, and H6 are likely to be true.
4. Empirical results
4.1 Descriptive statistics
With a standard deviation of 0.101, the businesses' average performance is 0.068. Table 2 displays this data. Company performance ranges from − 0.372 to 0.342 on an aggregate basis. Various variables, such as the sectors in which the firms operate or the current market conditions, contribute to the wide range of values for the performance statistic. With a standard deviation of just 0.718, executive salaries are quite concentrated around $14,744. A salary of 13,122 to 16,764 USD is possible. The distribution of executive salaries varies somewhat. The very dispersed distribution of executive equity, with a mean of 9.988 and a comparatively high standard deviation of 15.969, indicates considerable volatility. Values ranging from 0 to 61.872 are possible. The large degree of variety in executive equity suggests that there is a great deal of diversity across firms. The average executive benefit is 0.071 and the standard deviation is 0.055, with a range of 0.003 to 0.322. When it comes to benefits, most companies are very much the same, and senior perks are no different. A standard deviation of 0.148 and an average of 0.15 are the results of profit management. You may find REM values between 0.002 and 0.796. Real earnings management is something that some firms undertake extensively while others fail to do so.
Table 2
Descriptive Statistics
“Variable”
“Obs”
“Mean”
“Std. Dev.”
“Min”
“Max”
Fiperf
12078
0.068
0.101
-0.372
0.342
salary
12078
14.744
0.718
13.122
16.764
equity
12078
9.988
15.969
0
61.872
perks
12078
0.071
0.055
0.003
0.322
REM
12078
0.15
0.148
0.002
0.796
size
12078
22.654
1.267
20.309
26.511
lev
12078
0.433
0.194
0.063
0.849
top
12078
32.539
14.252
7.949
71.238
idr
12078
37.507
5.416
33.33
57.14
ndts
12078
0.02
0.014
0
0.062
tr
12078
0.926
0.082
0.56
1
state
12078
0.39
0.488
0
1
gr
12078
0.131
0.315
-0.497
1.766
4.2 Regression result
Table 3 of the regression results examines the links between CEO incentives (salary, shares, and perks), REM, and company success. Models (1) and (2), which both include fixed effects of businesses and years, are used to estimate them in order to account for unobserved heterogeneity. The findings highlight the strong interdependence of the parameters, which is crucial since these variables determine the relationships between earnings management, business success, and executive incentives. Executive Salary: Both Model (2) and Model (1) had salary coefficient values of 0.0393 and 0.0412, respectively, at the 1% level of significance. A greater CEO salary is strongly correlated with a considerable improvement in the firm's performance, as shown by these positive coefficients. This finding provides more support for the theory that executive compensation, and wages in particular, aids in correlating executive expenditures with the firm's performance. The CEO equity coefficient in both models is 0.0009, which is not very significant (less than 1%), but it is still worth mentioning. This positive correlation suggests that there is a relationship between the amount of stock owned by executives and their company's performance, which is consistent with the alignment theory's assertion that shareholders are better served by executives who have a financial stake in the company's success.
Executive Perks (perks): Model (1) shows an executive perks coefficient of -0.4467 and Model (2) shows an executive perks coefficient of -0.4577, both statistically significant at the 1 percent level. These negative coefficients suggest that increasing executive perks are related to poor company performance, implying that any excesses in perks may cause agency problems, where some executives are motivated by self-interest rather than long-term company interests. Thus, H1, H2, and H3 were proved. Real Earnings Management (REM): REM, in Model (2), has a coefficient of 0.0613 with a statistically significant coefficient at the 1% level. This finding suggests that real earnings management has a positive relationship with firm performance over the short run. Nonetheless, although this association could elevate short-term outcomes, the question regarding the viability of such performance arises as the tendency to manipulate earnings may hurt long-term value.
Model (2) incorporates the two-way interaction terms between components of earnings management and components of executive incentives (salary, equity, perks), and can be used to test whether or not the executive’s compensation moderates the relationship between earnings management and firm performance. REMsalary (Interaction between REM and salary): Coefficient of the interaction term is 0.0344, statistically significant, at the 1% level. The positive correlation is higher when using executive salary and firm performance, showing that when earnings are manipulated the executive salary has a stronger effect on performance. REMequity (Interaction between REM and equity): The interaction term coefficient = 0.0019, significant at the 1% level. This would mean that earnings management intensifies the beneficial impact of executive equity on firm performance.
Executive equity ownership has a positive impact on firm performance, which is amplified by earnings management, indicating that in the short run the benefits of equity ownership are amplified by earnings manipulation. REM + perks (Interaction between REM and perks): The interaction term coefficients is 0.6579 and statistically significant at the 1% level. This implies that, the adverse impact of executive perks on firm performance is minimised when earnings management is used. That is, earnings management mitigates the negative effect of executive extravagance. This indicates that although high executive perks generally are damaging to firm performance, the adoption of earnings management mitigates this adverse outcome, possibly due to the nature of earnings management as executives are able to achieve performance targets or manage financial outcomes, thereby reducing the adverse effects of executive-perks. Therefore, H3, H4, and H5 have been proven.
Table 3
Regression result of model (1) and (2)
VARIABLES
(1)
(2)
Fiperf
Fiperf
salary
0.0412***
0.0393***
(12.34)
(11.80)
equity
0.0009***
0.0009***
(4.69)
(4.93)
perks
-0.4467***
-0.4577***
(-12.24)
(-13.07)
REM
  
0.0613***
 
(6.16)
REM*salary
  
0.0344***
 
(3.24)
REM*equity
  
0.0019***
 
(3.65)
REM*perks
  
0.6579***
 
(4.17)
size
0.0178***
0.0192***
(4.51)
(4.94)
lev
-0.2363***
-0.2411***
(-15.22)
(-15.67)
top
0.0008***
0.0009***
(3.85)
(4.06)
idr
0.0000
0.0000
(0.07)
(0.11)
ndts
-1.5374***
-1.4980***
(-7.73)
(-7.59)
tr
0.0413*
0.0391*
(1.73)
(1.66)
state
-0.0198**
-0.0193**
(-2.13)
(-2.10)
gr
0.0647***
0.0595***
(17.14)
(15.77)
constant
-0.8536***
-0.8638***
(-8.98)
(-9.18)
Firm
FE
FE
Year
FE
FE
Observations
12078
12078
R-squared
0.530
0.538
“Notes: *, **, *** indicate significance at the 10%, 5%, and 1% levels, respectively, with cluster firm standard errors-based t-statistics shown in parentheses.”
4.3 Robustness test
This work provides three robustness tests to authenticate reliability of regression results. To test the robustness of findings, first, the dependent variable is substituted with an alternative measure of firm performance, replacing ROE with ROA. Second, it is important to note that China is rapidly developing, and industry classification criteria are regularly revised, so industry dynamics in the research time frame can create an estimation bias (Shi and Li 2020) to help reduce this possible complexity, we may use industry fixed effects in addition to company and year fixed effects. To further consider the possibility of endogeneity and reverse causation, the independent variables are included in the regression analysis one year after the fact (Tubik and Herberger 2024) The findings are more likely to be accurate if this check verifies that the directions of causation are correct. The dependent variable in Table 4(1) and (2) is ROA, while in Tables 4(3) and (4), the industry fixed effects are indicated. The outcomes of the regression using independent variables that were lag-treated are shown in two tables inside Table 4.
A
Table 4 details the outcome of various robustness cheques that were conducted to cheque the stability and reliability of the regression results. Such cheques involve substituting the dependent variable, incorporating industry fixed effects, and lagging the independent variables with one period to overcome possible endogeneity issues. The initial group of robustness tests substitutes the dependent variable to examine the robustness of the findings. In particular, the firm performance measure is adjusted to ROA, not ROE. The findings in Table 4 (1) indicate that the associations between the executive incentives (salary, equity, perks) and firm performance are strong, and the coefficients are substantial. The results are consistent in Table 4 (2), where interaction terms with earnings management (REM) are added, and the moderating effect of REM is equalised. This indicates that earnings management enhances the positive effects of salary and equity on firm performance and diminish the negative effects of perks. The second robustness test adds industry fixed effects to help explain industry-specific effects that could affect firm results. As in Table 4 (3), the executive incentives coefficients are significant.
By including the interaction terms with earnings management in Table 4 (4), the findings show that the effects of executive incentives are still mediated by earnings management. Such results imply that the addition of industry fixed effects does not significantly change the relationship among “executive compensation” and “firm performance,” nor moderating impact of earnings management. The third robustness test deals with possible endogeneity by lagging the independent variables one period. The results of salary, equity, and perks are significant in Table 4 (5), where the independent variables are lagged. Table 4 (6) indicates that the positive impact of salary and equity and the negative impact of perks are both still significant with the inclusion of the lagged variables and interaction terms with REM. Lagging aesthetics counter endogeneity issues and guard that any associations among executive pay and company performance are not vitiated by reverse causality. Overall, these robustness tests also confirm the hypotheses, giving evidence that results are robust to various specifications and adjustments, which also validates the accuracy of the findings.
“Table 4 Robustness Checks”
VARIABLES
(1)
(2)
(3)
(4)
(5)
(6)
Replace dependent variable
Add industry dummy
lagged one period
Fiperf
Fiperf
Fiperf
Fiperf
Fiperf
Fiperf
salary
0.0185***
0.0174***
0.0411***
0.0391***
  
0.0387***
(12.37)
(11.77)
(12.29)
(11.74)
  
(11.06)
equity
0.0005***
0.0005***
0.0008***
0.0009***
  
0.0010***
(5.04)
(5.34)
(4.50)
(4.69)
  
(5.08)
perks
-0.2382***
-0.2460***
-0.4519***
-0.4616***
  
-0.4491***
(-11.65)
(-12.96)
(-12.40)
(-13.07)
  
(-12.61)
REM
  
0.0349***
  
0.0640***
  
0.0590***
 
(6.56)
  
(6.37)
  
(5.72)
REM*salary
  
0.0198***
  
0.0344***
    
 
(3.65)
  
(3.22)
    
REM*equity
  
0.0009***
  
0.0019***
    
 
(3.11)
  
(3.68)
    
REM*perks
  
0.4483***
  
0.6522***
    
 
(5.12)
  
(4.12)
    
Lsalary
        
0.0175***
  
       
(5.27)
  
Lequity
        
0.0006***
  
       
(3.04)
  
Lperks
        
-0.3981***
  
       
(-10.65)
  
REM*Lsalary
          
0.0463***
         
(4.52)
REM*Lequity
          
0.0019***
         
(3.54)
REM*Lperks
          
0.4600***
         
(3.33)
size
0.0068***
0.0075***
0.0179***
0.0193***
0.0271***
0.0223***
(3.75)
(4.28)
(4.24)
(4.65)
(6.18)
(5.19)
lev
-0.1561***
-0.1589***
-0.2351***
-0.2399***
-0.2650***
-0.2580***
(-22.94)
(-23.75)
(-14.93)
(-15.38)
(-16.02)
(-15.88)
top
0.0004***
0.0004***
0.0008***
0.0008***
0.0009***
0.0009***
(3.70)
(3.95)
(3.61)
(3.79)
(3.79)
(3.88)
idr
-0.0000
-0.0000
0.0001
0.0001
-0.0001
0.0000
(-0.33)
(-0.28)
(0.26)
(0.27)
(-0.44)
(0.00)
ndts
-0.8256***
-0.8037***
-1.5332***
-1.5036***
-1.7538***
-1.7706***
(-8.70)
(-8.58)
(-7.74)
(-7.65)
(-8.02)
(-8.21)
tr
0.0205
0.0191
0.0475**
0.0448*
0.0458*
0.0319
(1.58)
(1.49)
(2.02)
(1.92)
(1.81)
(1.27)
state
-0.0050
-0.0048
-0.0204**
-0.0202**
-0.0184*
-0.0170*
(-1.16)
(-1.12)
(-2.24)
(-2.24)
(-1.87)
(-1.75)
gr
0.0298***
0.0269***
0.0641***
0.0588***
0.0870***
0.0589***
(16.03)
(14.60)
(17.26)
(15.81)
(21.92)
(15.52)
constant
-0.3234***
-0.3279***
-0.8619***
-0.8697***
-0.7054***
-0.9126***
(-7.26)
(-7.48)
(-8.33)
(-8.54)
(-6.81)
(-8.89)
Firm
FE
FE
FE
FE
FE
FE
Year
FE
FE
FE
FE
FE
FE
Ind
NO
NO
FE
FE
NO
NO
Observations
12078
12078
12078
12078
10980
10980
R-squared
0.599
0.608
0.536
0.543
0.531
0.551
“Notes: *, **, *** indicate significance at the 10%, 5%, and 1% levels, respectively, with cluster firm standard errors-based t-statistics shown in parentheses.”
5. Conclusion
The present study explores the linkage between executive incentives and firm performance keeping in view the moderator of earnings management in the hybrid institutional environment in China. Based on the data of “A-share listed companies” between 2013 and 2023, the findings revealed that the executive salary and equity incentives positively affect firm performance significantly. Conversely, executive perks show negative association with performance, implying that too much perks can result in agency problems, where executives focus on self-interest rather than long-term organisational welfare. Moreover, earnings management mediates these associations: it enhances the positive relationship between salary and equity and firm performance, and dampens the negative relationship between perks. Theoretical explanations of these findings represent the strain between executive motivations and corporate governance in transitional economies.
The situation in China is aggravated by the relatively opaque and discretionary nature of executive perks, which exacerbates agency problems there, where state control coexists with market forces. The beneficial outcome of salary and equity, however, with earnings management slowering their impacts, points to the alignment of executive interests with the interests of shareholders in a manner that eventually concerns the sustainability of such performance. Policywise, the results have profound implications to regulators such as the “China Securities Regulatory Commission (CSRC)”. The support is the further development of performance-based pay design, especially in salary and equity rewards. Nevertheless, the adverse effects of unregulated perks and earnings management demonstrate the necessity of higher disclosure regulations and controls, particularly relating to non-financial executive compensation. To address the agency costs related to such compensation, greater disclosure regarding executive perks could reduce their adverse effects, eroding value and jeopardising the interests of the long-term shareholders. This research offers practical recommendations to corporate boards and executives.
Executive compensation packages should be designed in a balanced way that considers both short-term rewards and long-term value creation. In particular, long-term performance indicators should be linked to equity incentives, whereas the application of executive perks must be closely controlled and oriented towards corporate objectives. Moreover, to threaten earnings manipulation, boards ought to implement strong governance instruments that promote transparency in financial reporting and make certain that compensation plans truly mirror firm performance beyond temporary modification. This paper has added to the executive compensation literature by presenting a tripartite framework of incentives (salary, equity, and perks) and conceptualising earnings management as a moderating force. This study builds on the agency theory by incorporating the behavioural governance and institutional theory to better comprehend the incentive-performance relationship in developing nations. In addition, it enhances comprehension of the impact that a special system of governance, which reinforces both state intervention and market competition, has on corporate behaviour and executive compensation in China.
Finally, the findings open up several future research avenues. Future studies could explore the cross-country comparison of executive incentives in hybrid institutional settings, particularly in other emerging markets such as India, Vietnam, and Indonesia, which share similar governance characteristics. Further investigations into non-listed companies and the use of non-financial incentives, such as social recognition or job satisfaction, would provide a broader perspective on executive compensation and its impact on firm performance. Additionally, the role of political connections in shaping executive behavior and governance under hybrid institutional conditions presents a promising avenue for future research.
Declarations
A
Funding:
Authors did not receive any funding.
Conflicts of interests:
Authors do not have any conflicts.
A
Data Availability
The data from the current study are available from Li Dingzhao upon reasonable request.
A
Author Contribution
Li Dingzhao is responsible for designing the framework, analyzing the performance, validating the results, and writing the article. Hafizah Abdul Rahim, Aliana Shazma Amir Amir is responsible for collecting the information required for the framework, provision of software, critical review, and administering the process.
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Yes
Total words in MS: 5951
Total words in Title: 16
Total words in Abstract: 95
Total Keyword count: 3
Total Images in MS: 0
Total Tables in MS: 4
Total Reference count: 69