Executive compensation and firm performance: Evidence from cross‐listed AH‐share firms

We apply sensitivity of executive compensation to firm performance as an effective measurement of corporate governance to examine the bonding mechanism among the cross‐listed Chinese firms between 2005 and 2017. Our sample covers the nonfinancial firms listed on both China and Hong Kong stock exchanges (AH‐share firms) and firms in China only (A‐share firms). We find that AH‐share firms have much higher sensitivity of executive compensation to firm performance than A‐share firms. However, the bonding effect only exists when executive cash compensation and firm accounting performance are considered. Executive compensation on stock return, chief executive officer turnover on firm accounting performance, or chief executive officer turnover on stock market performance, all demonstrate no bonding effect. The results are attributed to institutional environment in which executive compensation is solely dependent on accounting profits among Chinese firms, and the A‐share market offers weak investor protection. We also find that both legal and reputational bonding effects work on improved governance of AH‐share firms, although such effects are highly dependent on specific market mechanisms including that of firm executives. Our findings may contribute to current bonding literature and have policy implications on future state‐owned enterprise reforms.