Ownership Concentration and Executive Compensation in Closely Held Firms: Evidence from Hong Kong

53 Pages Posted: 27 Aug 2007 Last revised: 1 Aug 2022

Date Written: July 1, 2003

Abstract

This working paper was written by Yan-Leung Cheung (City University of Hong Kong), Aris Stouraitis (City University of Hong Kong) and Anita Wong (City University of Hong Kong).

Owners-managers of closely held firms effectively decide on the level of their own compensation. We test the relationship between ownership concentration and executive compensation, using panel data for a sample of 412 Hong Kong firms during 1995-1998. We find a positive relationship between managerial ownership and top executive cash emoluments for levels of ownership of up to 25 percent in small and in family controlled firms, and for up to 5 percent in large firms. We also find no sensitivity of pay to performance in small firms. These findings may indicate that in the presence of information asymmetry between owners-managers and outside investors the former may use their ownership rights to extract higher salaries for themselves. There is also evidence that top executives with larger shareholdings may be using dividends as a way to supplement their cash salaries. Further tests show that the observed relationships do not result from a link between compensation, performance, managerial effort, and managerial ownership. With the exception of boards of directors having an auditing committee, we find that boards cannot prevent this form of expropriation.

Keywords: ownership structure, executive compensation, corporate governance

JEL Classification: G32, G34, G35

Suggested Citation

Institute for Monetary and Financial Research, Hong Kong, Ownership Concentration and Executive Compensation in Closely Held Firms: Evidence from Hong Kong (July 1, 2003). Hong Kong Institute for Monetary and Financial Research (HKIMR) Research Paper WP No. 14/2003, Journal of Empirical Finance, Vol. 12, No. 4, 2005, Available at SSRN: https://ssrn.com/abstract=1009149 or http://dx.doi.org/10.2139/ssrn.1009149

Hong Kong Institute for Monetary and Financial Research (Contact Author)

(HKIMR) ( email )

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