Overpaid CEO and corporate innovation efficiency: Evidence from China

This paper constructs an overpaid CEO indicator to reflect the mismatch between CEO ability and compensation, and examines whether and how it distorts corporate innovation investment. We use Chinese A-share listed companies from 2009 to 2019 as research samples, and empirically test the effect of overpaid CEO and corporate innovation efficiency. The results show that overpaid CEOs decrease the corporate innovation efficiency, since CEOs pursue private benefits that are inconsistent with shareholders’ interests. The cross-sectional tests show that the negative effect of overpaid CEOs on innovation efficiency is more pronounced in firms with higher information asymmetry, state ownership, and high-tech industries, but is mitigated by stronger internal and external governance mechanisms. Further analysis indicates that overpaid CEO leads firms to conduct more low-quality, exploitative innovation. This paper provides insights into formulating more reasonable and effective CEO compensation in corporate and promoting corporate innovation activities.