Do Chinese CEOs Consume Abnormal Perks Before Leaving Their Firms?
Martin J. Conyon University of Pennsylvania – The Wharton School; European Corporate Governance Institute (ECGI)
Junxiong Fang Sr.Fudan University – School of Management
Lerong He State University of New York (SUNY) College at Brockport; University of Pennsylvania – The Wharton School
November 16, 2013
Abstract:
Economic success is driven by the optimal design of economic institutions. We investigate whether Chinese CEOs consume abnormal or ‘excess’ perks prior to leaving their firms. Agency models predict that CEO incentives and behavior might change in the years leading up to CEO turnover (the ‘horizon effect’). We predict that CEOs might consume excess perks at the expense of owners’ interests. Using data on Chinese publicly traded firms between 2003 and 2011 we find that abnormal perk consumption is significantly higher in the last two years of CEOs’ tenure compared to previous years. We also find that abnormal perk consumption is lower when the board is more independent, when the firm is privately controlled, and when the external auditor is more reputable. We find that perk consumption in CEOs’ terminal years vary with the type of CEO transition. Voluntary CEO turnover is associated with excess perks, whereas forced CEO turnovers are not. We find no evidence that abnormal perk consumption is associated with lower level of executive compensation, dispelling the idea that cash compensation and perks are substitutes. Instead, we document that abnormal perk consumption has a significant negative effect on firm performance. Overall, our results indicate that abnormal perk consumption and poor institutional design are correlated with managerial excess in China and there exists a horizon problem for Chinese executives.
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