**2. Literature Review**

The causes of policy uncertainty are failure of the government to clarify the direction and intensity of economic policy expectation, policy execution, and changes in policy position [4]. Economic uncertainty is difficult for enterprises to predict, which will enhance the external risks of business operations, and affects executives' cognition and behavioral decisions.

The existing literature measures the uncertainty of economic policy from the following three perspectives. The first type of literature measures the uncertainty of economic policy through the occurrence of external events, including major political events and changes in bureaucrats [5]. Since the occurrence of these events is not ongoing, their usage is subject to certain limitations. The second category uses the implied volatility of the stock market as the proxy variable of economic policy uncertainty. However, fluctuation in the financial market, which often lags behind, cannot reflect external economic policy uncertainty in real time. The third category of literature adopts the economic policy uncertainty index developed by Baker et al., based on the text analysis of newspapers. This method is authoritative, real-time and continuous, based on the reports of authoritative newspapers around the world. In this paper, we adopt the third type of measurement method.

At present, the research on the uncertainty of economic policy mostly focuses on corporate behavior, including corporate investment and financing, enterprise innovation, cash holdings [6–9], etc. The research related to economic policy uncertainty and executives mostly adopts the traits of executives as intermediaries or moderating variables to further study the impact of economic policy uncertainty on corporate behavior, for instance, their career records, including political background and financial experience, overconfidence, management governance [7,10–16], etc. Few scholars focus on the impact of economic policy uncertainty on executives' cognition and behavioral decisions. Based on the perspective of internal risk hedging, Rao [17] found that when the external uncertainty is high, the probability of executive turnover decreases. Wu [18] found that the uncertainty of economic policy is negatively correlated with executives' overconfidence. From the perspective of prospect theory, the uncertainty of economic policy comprises the uncertainties from policy change, policy execution, and the alterations of government positions. Facing external uncertainty, executives have uncertain expectations for the future of enterprises and themselves, which will lead to irrational bias in cognition and behavior choice, affecting their self-interest behaviors. At present, existing research seldom studies the relationship between economic policy uncertainty and executives' self-interest behavior, and related research needs to be further expanded.

According to the principal-agent theory, executives' self-interest behavior refers to the exploitation of their own rights and information asymmetry [19], in order to maximize their interests at the cost of shareholders and the enterprise, as illustrated by surging on-the-job consumption [20], seeking excess compensation [21], myopic behavior, cash flow manipulation [3], etc. In order to reflect the common behaviors of executives in listed companies, and present the explicit manifestations of their self-interest behavior, most scholars differentiate explicit self-interest behaviors from the implicit ones for quantitative research [1]. For explicit self-interest behavior, scholars commonly adopt excessive compensation [22,23], etc. With regard to implicit self-interest behavior, scholars use variables including excessive on-the-job consumption, management expenses, turnover of total assets [2,24–26], etc. Enterprises often take measures, such as supervision, reward, punishment, and incentive, to restrain the self-interest behavior of executives, and scholars mostly conduct research through the above related measures, including internal and external supervision, salary mechanism [27,28], etc. Change in the external macro-environment also affects executives' cognition and behavior choices. Executives will be passively restrained from self-interest behavior, or they may actively reduce such behaviors in exchange for stable income. The influence of economic uncertainty on executives' self-interest behavior needs to be further explored.

According to both the domestic and foreign literature, internal control reduces the asymmetry of internal and external information, strengthens internal supervision, plays an important role in reducing executive fraud [29] and preventing insider trading by executives [30], and exerts certain governance effects on both the implicit and explicit corruption of executives [31]. The above facts also lay a theoretical basis for choosing internal control as the moderating variable in this paper. With regard to the measurement of internal control quality, some scholars made a comprehensive evaluation through the five elements of internal control [32,33]. Scholars often adopt the internal control index of the DIB database to measure the quality of internal control [34,35].

By reviewing the existing literature, we can find that the research on the influencing factors of executives' self-interest behavior mostly focuses on corporate institutions, the strength of executives' power, etc., and seldom considers the influence of the external economic policy environment. Based on existing theories, negative cognitive theory induces executives to boost self-interest behaviors and gain immediate benefits under uncertain economic policies; however, based on the potential cost and risk, it is believed that due to the superposition effect of risks, executives are urged to restrain self-interest and tend to "protect themselves" against the risk of dismissal, thus reducing their self-interest behavior. However, the research on the uncertainty of economic policy focuses more on its impact on macroeconomic trends, corporate investment and financing, innovation and R&D, and financial market fluctuation. Macroeconomic policy and the fluctuation in economic fundamentals are the important foundations of enterprise behavior on the micro-level, and the uncertainty of economic policy will profoundly affect and change corporate behavior and decision-making. Under different degrees of policy uncertainty, executives' selfinterest behavior will be affected differently. In this paper, the macro-economic landscape is brought into the analysis framework of influencing factors of executives' self-interest behavior, and their self-interest behavior is refined into explicit and implicit categories. These two categories are quantitatively analyzed by adopting excessive compensation and on-the-job consumption, and the uncertainty of economic policy is adopted to analyze how the external environment affects executives' self-interest behavior, enriching the existing research results.

#### **3. Theoretical Analysis and Research Hypothesis**

This paper categorizes executive self-interest behaviors into explicit and implicit ones, and analyzes the influence of economic policy uncertainty on such behaviors. The explicit self-interest behavior of executives is exemplified by excessive compensation, and its implicit counterpart is measured by excessive on-the-job consumption.

On the one hand, at the corporate level, rising economic policy uncertainty amplifies the business risks of enterprises and exerts a negative impact on enterprise performance [36]. Changes in the economic environment will affect the survival and growth of enterprises. Rising economic policy uncertainty will make it difficult for management to predict the prospects of the market, as well as corporate financing and cash flow status in the future, making it more difficult to make decisions. In order to avert risks, C-suite often delays investment and lowers investment volume to alleviate the uncertainty, thus adversely affecting the performance of enterprises. Meanwhile, the financing of enterprises will also be affected by macroeconomic policies. Rising economic uncertainty will amplify instability in the future cash flow of enterprises and also aggravate the external financing challenges of enterprises. From the perspective of creditors such as banks, when economic policy is uncertain, the risk of loan default will rise, since it will be difficult to evaluate the credit of enterprises. Therefore, creditors will adopt a tight credit policy, raise the loan threshold, and reduce the loan amount, which pushes up the financing costs of enterprises and further undermines their development. Facing both internal and external difficulties, in order to maintain stable operation and ease operating pressure, enterprises will start to reduce expenses and compensation. On 2 June 2022, the State-owned Assets Supervision and Administration Commission (SASAC) issued the Notice on Further Implementing the

Tasks of Boosting Income and Reducing Expenditure of SOEs, which stipulated: "SOEs should strictly implement the linkage mechanism between total wages and profits, and the growth rate of total compensation shall not exceed that of total profit. SOEs with declining profits must cut total compensation." Therefore, when the uncertainty of economic policy is high, enterprises will face greater business risks, which will reduce C-suite enumeration, inhibiting excessive compensation of executives and their explicit self-interest behavior.

On the other hand, higher uncertainty of economic policy will lead to tougher employment. With rising external uncertainty, the turnover of executives will be more frequent, boosting the risk of dismissal [37]. Based on prospect theory, people tend to choose "safe returns" instead of "taking a chance". Even though self-interest behavior may bring some excess returns, if such behavior can be uncovered easily, the risk of turnover will also surge. Therefore, executives will suppress their explicit self-interest behavior to obtain "safe returns". Meanwhile, some executives choose to fulfill their social responsibility by taking the initiative to reduce salaries before ordinary employees. According to Vanke's 2021 annual report, due to the sharp decline in corporate performance, Yu Liang, chairman of the board of directors, voluntarily waived all bonuses in 2021 and reduced his compensation by nearly 90%. Eight directors, supervisors, and senior managers, including Yu Liang, reduced their salaries by half, totaling 24 million yuan. These executives not only fulfill their social responsibility, but also build good reputation and lay a solid foundation for their future career development. Therefore, when the uncertainty of economic policy is high, executives themselves will also choose to reduce their explicit self-interest behavior and excess remuneration.

However, executives' implicit self-interest, namely excessive on-the-job consumption, is affected differently by the uncertainty of economic policies. On-the-job consumption, also known as perquisite consumption or perk consumption, is the nonmonetary consumption spent by the managers, incurred when the manager is performing duties. On-the-job consumption is generally included in administrative expenses, which can be further divided into office allowance, travel expenses, correspondence expenses, etc. Although the "optimal" level of on-the-job consumption may motivate managers to perform well, excess on-the-job consumption may hurt firm value [38].

Managers increase their nonmonetary compensation to achieve self-utility maximization when the government supervision or other restrictions are weak [28]. With weak legal constraints and corporate governance mechanisms, on-the-job consumption has become an important part of management compensation in China, far more even than monetary compensation. Furthermore, on-the-job consumption is implicit, has no contractual constraints, and is largely determined by the top executives; executives are likely to deviate from the objective of maximizing stakeholder value and use on-the-job consumption to gain self-interest [39].

Higher uncertainty of economic policy leads to greater information asymmetry in enterprises; thus, the difficulties of internal and external supervision are also elevated, which facilitates executives to make use of their authority for on-the-job consumption and implicit self-interest behavior. Furthermore, as analyzed above, whether voluntary or forced, when the external uncertainty is high, the explicit remuneration of executives will decline. Therefore, executives are more inclined to use their authority to earn implicit benefits through on-the-job consumption to make up for salary loss. In addition, rising uncertainty of external economic policies often brings about greater financing difficulties for enterprises. In order to prevent capital chain rupture, enterprises tend to reduce investment while holding excess cash to cope with financial risks, which also provides opportunities for executives' invisible self-interest behavior.

In conclusion, concerning the impact of economic policy uncertainty on executives' self-interest behavior, this paper puts forward the following assumptions:

**Hypothesis 1 (H1a).** *Rising economic policy uncertainty will inhibit the explicit self-interest behavior of executives.*

**Hypothesis 1 (H1b).** *Rising economic policy uncertainty will encourage the implicit self-interest behavior of executives.*

Executives' responses to the fluctuation of external economic policy uncertainty are also influenced by the internal organizational structure and supervision system of their enterprises. Facing the uncertainty of the external macro-environment, enterprises need to improve internal control to better manage production and business activities and counter unknown risks. An effective internal control system can restrain executive opportunism, reduce information asymmetry, and alleviate the principal-agent problem between shareholders and C-suite, which is conducive to the long-term development of enterprises. "Internal environment", one of the five elements of internal control, requires enterprises to set up corresponding supervision mechanisms, establish sound organizational mechanisms, realize internal power checks and balances, avert "tyranny of the minority" and "insider control issue", and supervise the behavioral decisions of executives. Among the five elements of internal control, "Risk Assessment" requires enterprises to assess the possible risks in the future and formulate corresponding policies to prevent executives from speculating on the grounds of external risks. "Control activities" require enterprises to improve various management systems, better control the actual income and cost of each production and operation procedure, fix the loopholes of which C-suite may take advantage, and prevent their self-interest behaviors. "Information communication" encourages enterprises to reduce internal and external information asymmetry and improve the quality of information disclosure, which is conducive to the supervision of agents by stakeholders.

To sum up, this paper puts forward the following assumptions:

**Hypothesis 2 (H2a).** *Under economic policy uncertainty, effective internal control can enhance the inhibition of executives' explicit self-interest behavior.*

**Hypothesis 2 (H2b).** *Under economic policy uncertainty, effective internal control can weaken the facilitation of executives' explicit self-interest behavior.*

#### **4. Research Design**

#### *4.1. Data Sources and Sample Selection*

This paper adopts the data of A-share-listed companies in the Shanghai and Shenzhen stock exchanges from 2006 to 2021 as the research object, and has taken the following screening measures: (1) excluding the listed companies that were classified as ST and PT at the end of 2012 to 2021; (2) excluding listed companies in the financial sector; (3) excluding the listed companies that were forcibly delisted during the sample period; (4) eliminating the samples with missing observation values in the selected period; meanwhile, the continuous variables are winsorized at the top and bottom 1%. A total of 24484 observation samples were obtained after screening. The related data of explanatory and control variables in this paper were extracted from CSMAR, the economic policy uncertainty index of explanatory variables was sourced from the http://www.policyuncertainty. com/ website (accessed on 3 November 2022), and the internal control index of moderating variables was generated from the DIB database.

#### *4.2. Definition of Variables*

#### 4.2.1. Explanatory Variable

In this paper, the self-interest behavior of executives is regarded as the explanatory variable, which is divided into explicit and implicit self-interest behavior, measured by Csuite excessive compensation (OverPay) and excessive on-the-job consumption (UnPerks), respectively.

The detailed measurement of explicit self-interest behavior of executives-excessive compensation (OverPay) is as follows. In this paper, we adopt "the total compensation of top 3 executives" disclosed in the annual reports of A-share-listed companies in the Shanghai and Shenzhen stock exchanges as the data of executives' salaries, and the variables of C-suite compensation were obtained using a taking logarithm. Next, we drew from the practices of Core et al. [40], Luo et al. [41], etc. to measure the excessive compensation of executives. Firstly, Model (1) is regressed by years and industries using sample data to obtain the regression coefficient. Then, the estimated regression coefficient is multiplied by the factors that affect C-suite compensation, such as corporate scale and performance, to estimate the expected level of executive compensation; finally, according to Model (2), the actual C-suite compensation is subtracted from the expected C-suite compensation, and the difference is excessive compensation. The definitions of variables used in Model (1) are presented in Table 1.

$$Pay\_{i,t} = a\_0 + a\_1 Size\_{i,t} + a\_2 ROA\_{i,t} + a\_3 IA\_{i,t} + a\_4 Zone\_{i,t} + \sum Industry + \sum \text{Year} + \varepsilon\_{i,t} \tag{2}$$

$$OverPay = Pay\_{i,t} - Expected Pay\_{i,t} \tag{2}$$

**Table 1.** Definition table of overpay variables of executives.


The detailed measurement of implicit self-interest behavior of executives-excessive on-the-job consumption (UnPerks) is as follows. We draw from the research models of Quan et al. [42], Luo et al. [43], etc. and predict the normal on-the-job consumption of executives through the relevant corporate conditions of Model (3). The difference between actual and normal on-the-job consumption is abnormal on-the-job consumption. Among them, the C-suite on-the-job consumption is the balance of management expenses after deducting the total annual compensation, amortization of intangible assets, total provision for bad debts, and total provision for inventory depreciation. The definitions of variables used in Model (3) are presented in Table 2.

$$\frac{Pers\_{i,t}}{Aset\_{i,t-1}} = \beta\_0 + \beta\_1 \frac{1}{Aset\_{i,t-1}} + \beta\_2 \frac{Asal\varepsilon\_{i,t}}{Asset\_{i,t-1}} + \beta\_3 \frac{PPE\_{i,t}}{Asset\_{i,t-1}} + \beta\_4 \frac{Inventory\_{i,t}}{Asset\_{i,t-1}} + \beta\_5 LnEmployee\_{i,t} + \varepsilon\_{i,t} \tag{3}$$

$$
\Delta InPrks = Perks\_{i,t} - ExpectedPerks\_{i,t} \tag{4}
$$

**Table 2.** Definition table of excessive on-the-job consumption variables of executives.


#### 4.2.2. Explanatory Variables

The Economic Policy Uncertainty Index (EPU) of China is drawn from the website of http://www.policyuncertainty.com/ (accessed on 3 November 2022). From the newspapers People's Daily and Guangming Daily, Davis, Liu, and Sheng adopt the method of text analysis, counting articles related to economic policy uncertainty through scaling frequency, and formulating EPU after standardization treatment. At present, scholars at home and abroad use EPU when conducting research on economic policy uncertainty. This paper draws on the practice of Gu et al. [8]: the monthly data are arithmetically averaged, and then the logarithm is taken to obtain the explanatory variable EPU. Formula (5) provides more details.

$$EPL = LN \left( \frac{\sum \text{Economic policy uncertainty monthly}}{12} \right) \tag{5}$$

#### 4.2.3. Moderating Variables

In this paper, moderating variables are selected from the DIB internal control index, which is based on the five elements of internal control and granularly measures the internal control quality of listed companies. When the index is high, corporate internal control management activities are effective and the internal control system is sound. In this paper, we refer to the practices of Zhou et al. [44], etc., to establish an internal control moderating index after taking the logarithm of the internal control index.

#### 4.2.4. Control Variables

In this paper, the following indicators are selected as control variables, and the descriptions of each variable are illustrated in Table 3.


**Table 3.** Variable definition table.

#### *4.3. Model Setting*

#### 4.3.1. Economic Policy Uncertainty and Executives' Self-Interest Behavior

In order to validate the relationship between economic policy uncertainty and executives' self-interest behavior, this paper constructs the following econometric regression models. Model (6) is used to test the influence of economic policy uncertainty on executives' explicit self-interest behavior, so as to verify hypothesis H1a in this paper. According to H1a, *α*<sup>1</sup> of Model (6) should be significantly negative. Model (7) is used to test the influence of economic policy uncertainty on executives' implicit self-interest behavior, so as to verify hypothesis H1b in this paper. According to H1b, *β*<sup>1</sup> of Model (7) should be significantly positive.

$$OverPay = a\_0 + a\_1 EPL + a\_n \sum controls + \varepsilon\_{i,t} \tag{6}$$

$$Perk = \beta\_0 + \beta\_1 EPLI + \beta\_n \sum controls + \varepsilon\_{i,t} \tag{7}$$

#### 4.3.2. Moderating Role of Internal Control

Models (8) and (9) are used to test hypotheses H2a and H2b in this paper, respectively. By adding an interaction term including economic policy uncertainty and the internal control index to the regression equation, we can discuss the moderating function of internal control. Among them, in order to avoid the collinearity problem, in the interaction term of economic policy uncertainty and internal control index, the decentralized values of the two factors are multiplied.

$$OverPay = a\_0 + a\_1 EPL + a\_2 IC + a\_3 EPL \times IC + a\_n \sum controls + \varepsilon\_{i,t} \tag{8}$$

$$Park = \beta\_0 + \beta\_1 EPLI + \beta\_2 IC + \beta\_3 EPLI \times IC + \beta\_n \sum controls + \varepsilon\_{i,t} \tag{9}$$
