Research on Top Management Incentive and Supervision under the Framework of Principal-Agent Based on Social Trust

Abstract

This paper investigates the impact of social trust, an extremely important informal institution, on corporate governance. We use the data of 2008-2016 China’s A share listed private companies, to study how the regional social trust environment affect the efficiency of salary incentive mechanism on CEOs. We find that social trust can significantly improve the effect of executive compensation incentive, namely the compensation of the senior executive is more sensitive to performance in a firm with higher social trust. In particular, social trust can be an effective alternative to formal institution and plays an important role in corporate governance when the formal institution faced by the company is undeveloped.