Institutional Investors, Equity Incentive and Executive Compensation: An Empirical Study Based on Conflict of Interest

In the last few years, especially since the outbreak of the credit crisis, more and more scholars and professionals have realized that institutional investors are not playing a positive role in the executive compensation designing. Executive compensation mechanism, which institutional investors participate in, manifests shortcomings of high pay-performance sensitivity and gain/loss asymmetry that contributing to the conflict of interest existing in many corporate executives. Institutional investors in China are undergoing an explosive development, thus it´s natural to wonder whether there´s conflict of interest in China. This paper puts forward several common ways of conflict of interest or even conspiracy and examines our proposal by empirical model with data of listed companies from 2004 to 2008.The empirical result firmly supports the possibility of conflict of interest or even conspiracy between mutual fund managers and corporate managers, which keeps in line with the empirical study conducted by US scholars. It is suggested that the compensation mechanism serves as cradles of all sorts of conflicts of interest.