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ABSTRACTManuscript Type: EmpiricalResearch Question/Issue: We investigate the effect of insider control from the managerial power perspective and the global pay benchmarks from the behavioral approach on Chinese executive compensation.Research Findings: Based on a balanced panel sample of 502 Chinese listed firms between 2001 and 2006, we find that both CEO duality and CEO ownership exert significant influence on Chinese executive compensation contracting and they contribute to the high level of executive compensation. We support the managerial power hypothesis by arguing that CEO duality and CEO shareholding tend to entrench insider managers further to collude with government officials and extract a firm's assets. Shareholdings appear to actively restrain managers from serving their self‐interests as to their pay levels, including on the board independence and the supervisory board levels. However, private institutional shareholdings perform actively in restraining managerial influence on the executive pay setting. There is an upward increase in the executive pay levels due to the global pay benchmark effects introduced by foreign investment. The compensation committees' decisions on executive pay levels are largely influenced by the global peer group's pay levels, rather than linking to firm performance as predicted by the optimal contracting model.Theoretical Implications: We extend the optimal contracting model by incorporating the managerial power hypothesis to demonstrate how insider control affects the Chinese executive pay setting. We also add a behavioral approach to reflect how the global pay benchmarks affect the Chinese executive compensation setting via the negotiation between a firm's compensation committee and its managers.Practitioner/Policy Implications: The Chinese government should consider exerting rigorous restrictions on executive shareholding and management buy‐out as an incentive for managers. In addition, the Chinese Code of Corporate Governance should explicitly restrict CEO duality. The government should be aware of the potential influence of behavioral bias in human decisions departing from rational economical criteria, and set policies to balance the benefits of introduction of foreign investment against the costs of resultant excessive executive compensation, and the benefits of setting a compensation committee as a corporate governance control device against the costs of the compensation committees working with the executives together to increase the executive pay level.

AbstractBetween 2006 and 2017, 2,965 Chinese firms listed on the Shanghai/Shenzhen Stock Exchange have been studied to investigate whether better corporate environmental performance (CEP) leads to better access to capital and mitigates firms' financing constraints. It is hypothesized that better access to finance can be attributed to the increased government support due to enhanced firm political legitimacy and market legitimacy. Event studies find that the firms with better CEP suffer significantly lower finance constraints, and the evidence from the studies proves that firms' political legitimacy and market legitimacy are important in mitigating finance constraints. The results of the studies are confirmed by using two alternative measures of capital constraints and CEP, an instrumental variable approach, and a simultaneous equations approach.