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Empirical Study on Effect of Managerial Discretion on CEO Pay-Performance Sensitivity

Literatures have discussed the effect of many variables, such as firm size, firm risk and industry features etc., on CEO pay-performance sensitivity. However, it is indicated that the fact of persistent low CEO pay-performance sensitivity is still not explained effectively. From the perspective of internal governance structure, the paper takes managerial discretion, a variable most comprehensively reflecting corporate governance quality, as the critical influencing variable, and focuses on its effect on CEO pay-performance sensitivity. Based on the literature review and theoretical analysis, a hypothesis holding that managerial discretion can manipulate CEO pay-performance sensitivity negatively and significantly is proposed. Finally, by applying the data of 784 Chinese listed firms both of Shanghai Stock Exchange and Shenzhen Stock Exchange in 2004, the paper empirically proves that managerial discretion can negatively manipulate CEO pay-performance sensitivity significantly and high managerial discretion without effective monitoring is the critical factor of persistent low CEO pay-performance sensitivity.