Ownership stability and executive pay gap: evidence from China

In recent years, the executive pay gap has become a topic of concern from both theoretical and practical perspectives. In the specific context of executive pay regulation in Chinese state-owned enterprises, strategies to effectively motivate Chinese corporate executives are of particular interest. This article introduces the idea that stock turnover rate decreases—rather than increases—in response to bad news, and uses this idea to construct an ownership stability index. Based on 32272 panel data of A-share listed companies in China’s Shanghai and Shenzhen stock markets from 2005 to 2023, a fixed effects model is used to empirically test the relationships between ownership stability, Top Management Team (TMT) education faultline, and executive pay gap. The study indicates that both ownership stability and TMT education faultline widen executive pay gap, and TMT education faultline strengthens the role of ownership stability in widening executive pay gap. Further research shows that ownership stability mainly widens executive pay gap by strengthening positive management entrenchment. Under the moderating condition of TMT education faultline, the indirect effect of ownership stability on executive pay gap through management entrenchment still exacerbates executive pay gap. Property rights theory, stewardship theory, upper echelons theory, social categorisation theory, and tournament theory are integrated into an expanded and deepened principal-agent framework. Stable shareholders are deeply bound to executives’ interests; they support executives to conduct positive management entrenchment and use TMT education faultline as a tool to break through salary constraints and implement implicit incentives. Based on empirical findings, targeted implications are proposed for firm internal governance institutions and external regulatory agencies.