Abstract

The principal-principal problem is a salient corporate governance issue for emerging market firms. Extant literature on the P-P perspective discussed the unilateral expropriation from the controlling to the minority shareholders. In this study, we describe and test the consequence of a different form of P-P problem caused by the coordination and bargaining between the blockholders, which is likely to emerge in firms where multiple large shareholders coexist. We argue that the coordination and bargaining among MLS impair shareholder monitoring and make the top executive the “tertius gaudens” who benefits from the contention between shareholders. Based on data of Chinese listed firms that are embedded in an emerging economy, we propose and find that the balance of ownership among large shareholders substantially increases CEO excess pay. The effect is more salient in firms with higher R&D intensity and whose CEO holds more outside directorship. Moreover, our findings reveal that internal governance mechanisms including incentive alignment and outside director monitoring are not effective in mitigating the managerial expropriation entailed by MLS. Whereas external governance from the media coverage appears more conducive. We further discuss the contribution of the current study to corporate governance research. Keywords: Multiple large shareholders; Principal-principal problem; CEO compensation; Emerging market; Agency theory.