Effects of large shareholders' tunneling on executive incentive contract

Large shareholders' tunneling can affect executive incentive contracts. We divide the executive incentive into explicit compensation and implicit incentive. Data from publicly listed companies in China during 2008-2013 shows that tunneling leads to decline in executive pay-performance sensitivity. In addition, tunneling also leads to significant increases in position-related consumption. The results indicate that tunneling reduces the effectiveness of executive incentive contracts.