Foreign institutional investors and executive compensation incentives: Evidence from China*

This study examines the effect of foreign institutional investors (FIIs) on executive compensation incentives. Using the quasi-natural experiment of Shanghai (Shenzhen)-Hong Kong Stock Connect, we show that the presence of FIIs has a positive effect on pay-for-performance sensitivity (PPS) and helps to decrease excessive compensation. We also demonstrate that good corporate governance and high accounting information quality would be two possible underlying channels. Our results are more pronounced for firms with fewer state-owned shareholders and powerful managers. Overall, our results indicate that compared with domestic counterparts, FIIs are more effective at improving firms' executive compensation incentives.