Managerial Cash Compensation, Government Control and Leverage Choice: Evidence from Chinese Listed Firms

This paper investigates the relationship between managerial cash compensation and firm leverage decision for a sample of China's publicly listed firms during the period of 2003 similar to 2015. This paper employs simultaneous equation models to address the potential endogeneity caused by joint determination between managerial compensation and leverage. We find that cash compensation will motivate risk-taking behavior in capital structure decision of the firm. And ownership type will moderate the relationship between managerial cash compensation and capital structure. Management of government controlled firms will be less risk-taking on capital structure decisions although the same level of cash compensation is provided. Our results have significant implications for the design of compensation packages to achieve an appropriate risk-taking level of firm capital structure decision.