Abstract
This study is interested in the effect of controlling persons’ foreign residency rights for executive compensation. Based on a manually collected dataset of Chinese private listed firms from 2004 to 2018, we document that executives in firms with controlling persons with foreign residency rights receive higher excess compensation. These findings provide suggestive evidence consistent with the hypothesis that controlling persons with foreign residency rights design executive remuneration to obtain executives’ cooperation to take advantage of the lower probability of getting caught and punished for self-dealing behaviour. Consistent with this view, we find that the association between foreign residency rights and executive excess compensation is moderated by extradition agreements between destination countries/regions and China, executive ownership, and corporate governance mechanisms.
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Notes
According to the “world migration report 2020”, China has become the world’s third largest exporter of emigrants. The report is available at: https://publications.iom.int/books/world-migration-report-2020-chinese.
Available at: http://news.sina.com.cn/o/2014-03-12/071029685917.shtml.
In order to obtain an investor emigrant status, entrepreneurs need to invest a large amount of money in the destination country or region. For example, United States’ Foreign Investor Program has a minimum investment requirement of USD 500,000.
CSRC is the abbreviation of China Securities Regulatory Commission, the same hereafter.
According to the CSRC's definition, the firm’s controlling shareholder is either the firm’s largest shareholder, or the shareholder who can control the composition of the board of directors and influence key decisions through share ownership, contracts, or other legal arrangements.
The report is available at: https://publications.iom.int/books/world-migration-report-2020-chinese.
Refer to the “2011 China Private Wealth Report” released by China Merchants Bank and Bain &Co. Available at: http://images.cmbchina.com/cmbcms/201104/8e0597fb-dd78-4a49-a128-99aa80c4ef0e.pdf.
The report is available at: http://images.cmbchina.com/cmbcms/201706/77ab532d-a464-4950-b358-dde20a2adc4d.pdf.
The sample, that cannot identify the controlling persons due to its decentralized ownership structure, includes 26 firm-year observations for the period 2004 to 2018, made up of 8 unique firms, 0.22 percent of the total sample.
In the “2010 Henley Visa Limit Index”, China ranked 88th, only better than Afghanistan, Iran, Lebanon, and Pakistan.
Hong Kong, Macao and Taiwan are special administrative regions of China, Chinese passport holders who do not have visas from Hong Kong, Macao and Taiwan are not allowed to enter these areas freely unless they are in transit. Moreover, Chinese passport holders could visit very few developed countries without a visa. In the “2010 Henley Visa Limit Index”, China ranked 88th, only better than Afghanistan, Iran, Lebanon, and Pakistan. However, Hong Kong, Macao and Taiwan passport holders are exempted from visa applications for short term visits to many countries. Therefore, in the baseline analysis of the main table, we take Hong Kong, Macao and Taiwan residency rights as foreign residency rights, and then in an alternative analysis, we treat them as domestic residency rights.
Among our sample, two countries have extradition agreements with China: the Philippines, and Indonesia. The Philippines signed an extradition agreement with China on Oct 30, 2001 and Indonesia signed an extradition agreement with China on July 1, 2009.
For details on variable construction, see Chen et al. (2017a).
The three authoritative financial newspapers are China Securities Journal, Shanghai Securities Journal, and Securities Times.
In 2004, the CSRC mandated that the voting behavior of directors be publicly disclosed to improve corporate transparency and provide timely warnings to the market of compromising situations. The mandatory disclosure rule provides the director voting records data that are not publicly available in other major market.
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Acknowldegment
Xue Tan, the corresponding author. The authors acknowledge the financial support of National Social Science Foundation of China (Grant No. 21CGL009), Hunan Key Laboratory of Macroeconomic Big Data Mining and its Application, and China Scholarship Council.
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Peng, M., Tan, X. Does controlling persons’ foreign residency rights influence executive compensation?. Rev Manag Sci 17, 2375–2416 (2023). https://doi.org/10.1007/s11846-022-00583-z
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DOI: https://doi.org/10.1007/s11846-022-00583-z