From external to internal: The influence of ousted corrupt officials on CEO pay-for-performance sensitivity

We leverage an exogenous shock—the ousted corrupt officials in anticorruption campaign—and examine how the CEO pay-for-performance sensitivity (PPS) was affected. We argue that the staggered removal of provincial officials on corruption charges during China’s anticorruption campaign leads to increased firm exposure to anticorruption enforcement, prompting firms to transition from external to internal attribution. We suggest that the firm exposure to anticorruption enforcement (ousted corrupt officials in firm’s location) will increase CEO PPS in a firm. Furthermore, we examine how the effect of firm exposure to anticorruption enforcement on CEO PPS varies across different levels of political involvement. Our analysis reveals that the positive association between firm exposure to anticorruption enforcement and CEO PPS is attenuated for state-owned enterprises (SOEs). Conversely, this relationship is amplified for firms with greater reliance on entertainment expenses or when the political embeddedness of ousted corrupt officials is more pronounced. This study makes significant contributions to the literature on CEO PPS and business-government connections.