Does the internal pay gap of executives affect the innovation outputs? Evidence from listed companies on GEM

Abstract

This paper examines the impact of internal pay gap on innovation output in Chinese listed companies on GEM. Using a sample of non-financial companies listed on GEM during 2012-2021, this study found that enterprises’ internal pay gap positively promotes firms' innovation output, but when the pay gap exceeds a critical value, innovation output tends to decline, i.e., an inverted "U" shape is observed. When adding external financing channel as moderating variables, it is concluded that debt financing will strengthen the positive relation between internal pay gap and innovation performance, and equity financing may weaken the positive relation between internal pay gap and innovation performance. These results are also robust when performing regression by replacing the independent and dependent variables and by different industry samples. This thesis shed light on the role of tournament incentives on the corporate innovation output for enterprises and policymakers to make effective compensation distribution decisions.