Impression Management, Forward-Looking Strategy-Related Disclosure, and Excess Executive Compensation: Evidence from China

We investigate whether overpaid executives in Chinese listed firms engage in impression management by using forward-looking strategy-related disclosure (FLSD) in management discussion and analysis (MD&A) narratives to justify their excess compensation. Using a sample of 8,437 firm-year observations of Chinese nonfinancial listed firms from 2007 to 2016, we find a significant and positive relationship between executive overpayment and impression management in FLSD. This positive relationship is more pronounced in state-owned enterprises (SOEs) than non-SOEs. We also find that a higher degree of board independence, higher institutional shareholdings, auditors, analysts, and the introduction of the anti-corruption campaign could lower such a positive relationship. These findings suggest that impression management in FLSD is reduced when corporate governance is strengthened. We also find that CEO duality could enhance this positive relationship. Further examining how the market reacts to such impression management, we find an immediate positive and significant market reaction to such impression management at the time of the annual report filing, which could further mitigate the negative perceptions from stakeholders due to excessive pay. Such a positive market reaction is reversed over a longer time horizon, which supports the opportunistic/symbolic nature of impression management in FLSD.