Executive compensation limits and corporate M&As: Evidence from a Quasi-natural experiment

Abstract

Based on the exogenous shock of the executive compensation limit applied to state-owned enterprises (SOEs), this study examines the impact of executive compensation restrictions on corporate merger and acquisition (M&A) activities. We find that the Chinese government policy restricting executive pay decreases corporate M&A activities in SOEs; that is, it reduces both the likelihood and the frequency of M&A transactions. This effect is more pronounced for firms in less competitive markets, firms with better corporate governance, and firms with greater expansion demand. The underlying mechanisms include political promotion incentives, executive perks, and managerial overconfidence. The evidence also shows improvements in the quality of M&As and enhanced efficiency in corporate investments. Our findings demonstrate the consequence of compensation contract design in SOEs compared to non-SOEs, offering valuable insights for regulators, managers, and investors.