Qiao Liu, HKU

1. CFS021002HK-ZWE391-ql Discussion of Compensation regulation and perquisite consumption of SOEs in China (by Donghua Chen, Xinyuan Chen, and Hualin Wan) Qiao Liu, HKU International Conference on Corporate Governance in Asia and China March 13, 2005

2. Focus of This Study – the Perquisite Consumption of SOEs in China Executive compensation consists of • salary plus bonus • equity related compensations, e.g., stocks, stock options • Internal promotion, or more broadly, reputation and career concern • the Perquisite Consumption (on-the-job consumption), including expenses on travelling, working, entertainments, communications, overseas training, board meetings, cars and conferences • Because of compensation regulation, on-the-job consumption becomes a very important form of executive compensation. This paper addresses two questions: • What determine the perquisite consumption? • The value implication of the perquisite consumption.

3. A Snapshot of Main Findings The value implications of perquisite consumption The determinants of perquisite consumption • Perquisite consumption negatively relates to the ratio of management pay to average employee pay (a proxy for compensation regulation in this study), and this effect is more conspicuous among SOEs. • Protected industries tend to consume less perquisite consumptions • More profitable firms, and levered firms tend to have higher level of perquisite consumptions • Perquisite consumption negatively affects the stock performance • Relative pay ratio – the ratio of management pay to the average employee pay – positively affects stock performance. Clearly, perquisite consumption is not a substitute for management pay. • Size positively affects stock return. • Management ownership does not affect firms’ stock performance

4. Overall Comments • This paper attacks a very important issue – the determinants and effects of perquisite consumption in the context of Chinese publicly listed firms. • The research design is quite clean • Well written, and easy to follow

5. Of Course, There is always room for further improvement… The value implications of perquisite consumption The determinants of perquisite consumption • In stead of using the logarithm of total perquisite consumption as the dependent variable, should you control for the impact of size? It seems to me using PERK/Sales, or PERK/# of employee, is more appropriate. • Perquisite consumption in this study consists of eight different categories of expenses, some of which are clearly used to strengthen the relationship with supplies, government officials, and creditors rather than used as private consumption. How are the different components determined? Distinguishing them is very important. • Is it possible to control for several other factors, such as tax burden, government help? • Why only use stock returns? In this context, accounting performance measures, and productivity measures are also insightful. • This point relates to the second points mentioned earlier, exploring how differnet components in PERK affect firm performance can help you distinguish whether PERK is used as a form of executive compensation or just some kind of “wheel-greased” money. • Size positively affects stock return sounds strange. Do you have an explanation for it? • Lastly, I am not sure whether you can use PERK as a right-hand side variable given that you clearly state PERK is an endogenous variable. Can you find instruments for PERK?

6. Thanks