Executive pay bandwagon and stock price crash risk

Abstract

Purpose This paper aims to investigate the impact of executives’ self-interested behaviors induced by the pay bandwagon on stock price crash risk in Chinese listed firms and attempt to shed light on the influencing channels of this effect. Design/methodology/approach The empirical analysis is based on the panel data set which contains information on the executives and stock price of 11,710 firm-year observations over the period 2007–2015. The multiple linear regression models are implemented to examine whether the executive pay bandwagon affects corporate future stock price crash risk. Then, earnings management, tax avoidance and overinvestment are applied as the behavior choice of executive pay bandwagon to analyze the potential influencing channels. Findings Results indicate that the lower the executives’ pay is than the median pay level of executives in firms of similar size and industry, incentives of pay bandwagon are stronger, leading to a higher future stock price crash risk. Moreover, evidence shows that the positive relationship between executive pay bandwagon and crash risk is attenuated when firms have strong external monitoring mechanisms such as Big Four auditors, cross-listing in the Hong Kong stock exchange, high marketization process and high institutional ownership. Then, some weak evidence supports that internal governance such as internal control plays the same moderating role. In addition, based on the path test, the stock price crash effect of the executive pay bandwagon has a complete tax avoidance intermediary effect and a partial earnings management intermediary effect. Originality/value This study contributes to the executive compensation literature from a psychological perspective on the economic consequences research brought about by the pay bandwagon for China’s listed firms. Moreover, this paper provides a supplement to the literature on factors which is completely different from previous studies that affect the future stock price crash risk.