Proceedings of Global Business and Social Science Research Conference
11 - 13 May 2015, Grand Mirage Hotel, Bali, Indonesia, ISBN: 978-1-922069-75-7
Steady Compensation, Overconfident Executive and OverInvestment: Evidence from Chinese Corporations
Danlu Bu, Homayoon Shalchian and Chenyu Zhang
During the past decade, there has been a significant growth of excessive investments within
Chinese corporations, due to the practice of free market and the rise of corporate profit.
Concerning the Chinese executives’ compensation mechanism, it can be described as
“Generous Reward and Gentle Penalty”. It consists of a system where executives can obtain
rewards for their success while they can rather easily justify their failure. Such compensation
mechanism creates a certain stability of compensation for Chinese executives that we call
“Executive Compensation Steadiness” (ECS). It has been argued that ECS is one of factor that
could explain the over-investment in Chinese companies.
The objective of this study is to investigate the relation between Executive’s compensation
steadiness and over-investment in China. We, thus, measure ECS for our sample companies in
order to analyze its relation with over-investment among listed companies as well as stateowned enterprises (SOEs) in China. Our results also show that ECS seems to have a higher
impact on over-investment in listed companies relative to state-owned companies. Finally, our
results suggest that ECS seems to have a higher impact on over-investment for companies
controlled by local (provincial) governments relative to those controlled by central government.
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Danlu Bu (Ph.D), Professor of accounting in the School of Finance & Accounting, South-western University,
555 Liu Tai Avenue, Wenjiang District, Chengdu (Sichuan), China, Tel: (86) 138-0818-6388, Email:
budanlu@swufe.edu.cn
Homayoon Shalchian (Ph.D), professor of finance in the School of Commerce at Laurentian University, 935
Ramsey Lake Road, Sudbury (Ontario), Canada, P3E 2C6, Tel: (705) 675-1151, E-mail:
hshalchian@laurentian.ca
Chenyu Zhang (Ph.D candidates) at University of International Business and Economics, 10 Huixin Road,
ChaoYang District, Beijing, China, Tel: (86) 106-4494-006, E-mail: chenyu890707@163.com