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Executive incentive compatibility and selection of governance mechanisms

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  • Rong Xu
  • Guangli Zhang
  • Junyan Zhang
  • Zhigang Zheng

Abstract

Executive incentive compatibility plays a crucial role in firm's selection of corporate governance mechanisms. We provide a simple model to explain why firms with enough executive incentive compatibility still prefer having external governance mechanisms, and firms with poor executive incentive compatibility have to rely on a combination of large investors monitoring and external governance. This model facilitates a better understanding of the co‐existence of the two governance mechanisms and also reconciles conflicting findings with respect to a substitutive and complementary relationship between the two governance mechanisms. Empirical evidence supports there is a substitutive relation between large investors monitoring and executive compensation.

Suggested Citation

  • Rong Xu & Guangli Zhang & Junyan Zhang & Zhigang Zheng, 2020. "Executive incentive compatibility and selection of governance mechanisms," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 60(1), pages 535-554, March.
    • Handle: RePEc:bla:acctfi:v:60:y:2020:i:1:p:535-554
    DOI: 10.1111/acfi.12323
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