Purpose This paper aims to mainly investigate the role of trust, which is an important informal system, in executive compensation incentives. Design/methodology/approach Using the data of Chinese A-share private enterprises from 2003 to 2014, the paper estimates the effect that trust has on executive compensation incentives. Findings Results indicate that trust can significantly enhance the effectiveness of executive compensation incentives. Furthermore, the better the regional trust environment in which companies are located, the more pronounced the effect is. In particular, the effect of trust on executive compensation incentives is only significant when the formal legal system is immature. As companies continue to grow and develop and the formal system becomes perfect, the role of trust weakens. The formal system, including the corporate governance mechanism and perfect legislation, then becomes the key to promoting executive compensation incentives. Practical implications This paper provides evidence of the significance of both informal and formal systems. It not only emphasises the important role that the informal system has played in “the mystery of China’s economic growth” but also supports the “ruling the country by law” strategy for the sustainable development of China’s economy. Originality/value This paper reveals the relationship between the formal and informal systems, which provides a new perspective on and empirical evidence for the determinants of executive compensation incentives, and it also finds an explanation for the rapid growth of China’s economic development.
Purpose The purpose of this study is to investigate the interplay between economic governance and privatization, and how these two instruments affect the entry mode choice of the foreign firm and the social welfare of the host country. Design/methodology/approach This study constructs a mixed duopoly model wherein one domestic public firm competes with a foreign firm and investigates the influence of economic governance investment on the domestic government’s optimal degree of privatization choice and the foreign firm’s entry mode choice. Findings This study shows that (1) better economic governance enhances the effect of privatization on output, thus resulting in a lower degree of privatization; (2) the optimal privatization policy of the domestic government is partial privatization irrespective of the foreign firm’s entry mode choice; (3) with optimal investment by the domestic government on economic governance, the optimal degree of privatization is higher under FDI than export, and the host-country welfare is also higher under FDI. In particular, this study demonstrates that better economic governance decreases the threshold of the degree of privatization when the foreign firm switches from export to FDI, implying that better economic governance stimulates the foreign firm to undertake FDI in the host country. Practical implications The findings shed some light on both the mixed ownership reform of the SOEs in China and attracting foreign capital inflow to improve the host country’s social welfare. Originality/value To the best of the authors’ knowledge, this study constitutes the first attempt to build a theoretical framework to explore how the interactions between economic governance and privatization influence the entry mode choice of the foreign firm.
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