Unpaid Chairperson: A Free Lunch for Shareholders?

Unpaid chairpersons prioritize other stakeholders resulting in shareholder wealth loss. Using a sample of Chinese listed firms from 2005 to 2018, we find that firms who have chairpersons that they do not directly pay, underperform counterparts with paid chairpersons. The results are robust after we address endogeneity concerns. Additionally, the negative impact of unpaid chairpersons on firm performance is more pronounced in firms with weaker corporate governance. Further tests show that firms with unpaid chairpersons are less likely to engage in risky but value-enhancing activities and be involved in lawsuits, which provides evidence that unpaid chairpersons seek personal reputational benefits through risk aversion. This study not only enriches the literature on the economic consequences of unpaid firm leaders, but also has important practical implications for the design of incentive contracts.