Minority shareholder activism, threat of exit and pay-performance sensitivity

This study investigates whether and how minority shareholders activism (MSA) affects executives' pay-performance sensitivity (PPS). Based on annual data of listed companies on SSE and SZSE from 2010 to 2021, we find that MSA significantly promotes executives' pay-performance sensitivity, through the mechanism of disciplining management with exit threats. Such effect is prominent only for non-SOE firms. The results are robust after mitigating endogeneity issues and using one-period-lagged MSA. Our findings indicate that minority shareholder activism plays an important role in improving the effectiveness of executive compensation contracts.