Regulating CEO compensation: A remedy for corporate misconducts in China's state-owned enterprises

The growing compensation disparity between CEOs and employees has become a global concern, underscoring the need for regulatory measures to ensure fair and equitable remuneration practices. Drawing insights from China's government regulation of CEO compensation (GRCC) for state-owned enterprises (SOEs), this study investigates the impact of GRCC on fraudulent activities within SOEs. Using data from China's A-share listed firms between 2010 and 2022 and applying logit regression models within a difference-in-difference framework, our empirical findings show a significant reduction in fraud following the implementation of GRCC. Additionally, the effect of GRCC is more pronounced in local SOEs compared to their central counterparts. Channel analysis reveals that GRCC promotes CEO political promotion, improves the quality of internal controls, and alleviates financial constraints within firms, which collectively reduce fraudulent activities. The results remain robust across various endogeneity tests, parallel trend assumptions, propensity score matching, placebo tests and alternative variable measurements.<p></p>