The effect of common ownership on executive incentives remains largely unexplored in family firms, where ownership is typically concentrated among controlling shareholders rather than institutional investors. Drawing on a sample of Chinese listed family firms, we find that controlling shareholder common ownership enhances compensation contract effectiveness by increasing executive pay‐for‐performance sensitivity. We further show that the governance effect is stronger in firms with higher information asymmetry and less controlling shareholder tunnelling; in firms with lower institutional ownership and media coverage; and in firms led by non‐family CEOs, with fewer family members in management, and at the founder stage. These results suggest that common ownership by controlling shareholders is particularly effective when internal and/or external governance is weak and the controlling shareholders have monitoring incentives. Furthermore, controlling shareholder common ownership also reduces compensation stickiness, mitigates executive excess compensation, and increases the sensitivity of executive turnover to firm performance. In contrast, common ownership by non‐controlling shareholders does not have a significant effect on executive compensation contracts in family firms. Overall, our findings suggest that common ownership by controlling shareholders can improve the effectiveness of executive compensation contracts.
Dong et al. (Sun,) studied this question.