Government CEO pay regulation and corporate innovation performance: The role of CEO’s career horizon and shareholding

Abstract

This study investigates the effect of government pay policy for chief executive officer’s (CEO’s) compensation on corporate innovation (CI). Furthermore, it explores the role of the CEO’s career horizon and shareholding in this nexus. Utilizing the difference-in-differences method to analyze Chinese-listed state-owned enterprises from 2010 to 2020, the baseline findings indicate that government pay policies have had a negative impact on CI. In addition, CEOs with shorter career horizons and higher shareholding demonstrate an enhanced ability to counteract the adverse effects of pay policy, thereby sustaining high levels of innovation. Our findings indicate a necessity for regulatory bodies to re-evaluate mandated constraints on CEO compensation. These restrictions lead to a decline in firm innovation, ultimately affecting shareholder interests. Importantly, the study conclusions remain robust even after rigorous analysis using parallel trend assumptions, propensity score matching, alternative pay policy and innovation metrics, and placebo tests. JEL CLASSIFICATION: J3, M1, K2, O3