No full-text available
To read the full-text of this research,
you can request a copy directly from the authors.
The impact of firm prestige on executive compensation
Abstract
We show that chief executive officers (CEOs) of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortune’s ranking of America’s most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance or for increased exposure of the pay-setting process to media attention.
... Theoretically, much of the existing literature that examines the link between pay and performance has relied on two main theories: optimal contracting (OCT) and prestige (PT) theories (Bebchuk et al., 2002;Focke et al., 2017). OCT suggests that highly paid managers are often subject to public scrutiny and criticism, and thus, they are likely to be motivated to improve the short-term performance targets of their institutions in order to justify their pay (Heery, 1998), and hence, OCT expects that HEIs that focus primarily on setting and meeting short-term performance targets to pay their VCs high pay packages 2 . ...
... On the other hand, PT suggests that socially/community-oriented institutions are often more concerned about promoting good social relations and networks with the various groups of stakeholders in order to improve their reputation and long-term sustainability (Focke et al., 2017). This implies that HEIs that focus on meeting long-term social performance targets are likely to pay their VCs low pay packages. ...
... Theoretically, prior studies examining the link between an institution's top management pay and performance have largely utilised two theoretical perspectives: PT and OCT (Bebchuk et al., 2002;Focke et al., 2017). PT indicates that CEOs may sometimes be concerned with meeting the long-term social interests of stakeholders in order to boost their social status and future job prospects in the labour market (Magnusson, 2016). ...
This paper investigates the association between UK higher education institutions (HEIs) long-and short-term performance measures, and the pay of vice-chancellors/principals (VCs) in an era of intense neoliberalism/financialisation of HEIs, and consequently ascertains the extent to which the VC pay-performance nexus is moderated by VC characteristics. Using a longitudinal sample of UK HEIs, our baseline findings suggest that HEIs that prioritise meeting long-term social performance targets tend to pay their VCs low pay packages, whilst HEIs that focus on achieving short-term reputational performance targets pay their VCs high pay packages. We show further that the VC pay-performance relationship is moderated/explained largely by VC characteristics. Our findings are robust to controlling for alternative governance mechanisms, endogeneities, alternative performance measures and different estimation techniques. Our findings offer empirical support for optimal contracting and prestige theories with significant implications for the sector.
Keywords: Vice-Chancellor/Principal pay, Performance, Vice-Chancellor/Principal characteristics, Governance, Financialisation/Neoliberalism, HEIs, Prestige theory, UK
... According to reputation theory, reputation is an intangible asset for firms under incomplete information context (Tadelis, 1999). Agarwal et al. (2015) think that corporate reputation is a vital intangible asset and a guarantee for the managers to realize and sustain their interests (Focke et al., 2017). However, a bad reputation damages firms' value and injures manages' image, remuneration, and career development. ...
... Moreover, firms are more worried about reputation loss caused by media coverage than sanctions in an environment with weak environmental regulations. Given the negative impact of the reputation loss (Agarwal et al., 2015;Focke et al., 2017), firms are inclined to engage in environmental R&D to compensate for the reputation loss. Therefore, under weak environmental regulations, media coverage's reputation effect has more incentive effect on firms environmental R&D. ...
Environmental research and development (R&D) is an effective means to coordinate firms’ sustainable development and environmental protection. This study investigates the impact of media coverage on environmental R&D with the Environmental Protection Law’s exogenous shock in 2015 in China. The results show that both media coverage and the Environmental Protection Law significantly promote firms’ environmental R&D. Moreover, the Environmental Protection Law strengthens the positive effect of media coverage on firms’ environmental R&D, and the strengthening effect is more significant for firms with low internal control quality and in high-competition industry. Further researches suggest that environmental R&D fully mediates the relationship between media coverage and environmental technology innovation, while the Environment Protection Law has no significant effect on environmental technology innovation. The results demonstrate external supervision or regulations are conducive to environmental R&D, which conforms to Porter Hypothesis. This study has certain enlightening significance to firms’ environmental R&D, environmental technology innovation, and sustainable development in developing economies.
... This has led to controversy about the determinants as well as the implications of compensation arrangements (e.g. Jensen & Murphy, 1990;Murphy, 1999Murphy, , 2013Bebchuk & Fried, 2003, 2005Focke, Maug, & Niessen-Ruenzi, 2017;Benischke et al., 2019). The purpose of this section is to examine whether and to what extent the observed trends in CAO compensation are accompanied by changes in the demand for skills that describe the profile of the CAO skill set, and whether the resulting variations in compensation can be regarded as, eventually, being in the interest of universities. ...
... We begin our analysis by examining the impact of CAO skills on compensation in the context of institutions with better or poorer reputations. This hypothesis is motivated by Focke et al. (2017), who find that managers of prestigious firms earn less money. ...
Using a comprehensive sample of U.K. universities, we find that generously compensated Chief Academic Officers (CAOs) contribute to better university performance. Interestingly, while the level of CAO remuneration is positively related to general managerial skills, as proxied by the diversity of their prior work experience, such skills are not associated with superior university performance. Additional tests indicate that the positive association between CAO compensation and institutional academic performance is enhanced by managerial discretion, whereas generalist CAOs earn higher compensation when they have greater career concerns. Overall, the results inform the ongoing debate on the appropriateness of remuneration levels for CAOs and the literature on underlying causes of rising compensation levels in academic institutions.
... To make the match, we estimated propensity scores using all the variables included in our baseline model as control characteristics. We then applied six matching estimators to obtain the matched firms as selecting these firms requires decisions about closeness-of-match and the total sample size of the control firms selected (Chang & Shim, 2015;Focke et al., 2017;Lins et al., 2013;Subrahmanyam et al., 2017). Lower tolerance for the maximum propensity score distance (calliper) lessens the risk of bad matches. ...
This paper focuses on the use of bank debt by private family firms and whether it is higher for the first generations of family businesses than for their descendants and subsequent generations. We use a unique hand‐collected data set of 4,041 private Spanish firms for the years 2004 to 2013. We find statistical evidence that family‐controlled firms make greater use of bank credit. Moreover, we show that first‐generation family firms acquire more bank debt than those of second and subsequent generations. Furthermore, during financial crises, family‐controlled firms were subjected to less rationing, with increased bank financing for first generations.
... That factor is the compensation of executives or directors. Focke, Maug, and Niessen-Ruenzi (2017) stated that CEOs of companies listed in the top 100 of Fortune's "America's Most Admired Companies" earn less. CEOs are willing to ignore additional compensation if they work for wellknown companies. ...
Tax avoidance is the hottest issue in the last five years. It is reinforced with the Tax Amnesty Program by the Directorate General of Taxation (DJP), which began in June 2016. Therefore, this study aims to obtain empirical evidence of the influence of good corporate governance and executive compensation on corporate tax avoidance. This study used 215 banking companies listed on the Indonesia Stock Exchange (IDX) for 2014-2018. This study using a purposive sampling method that produced 119 suitable samples. The analytical method used is multiple linear regression analysis through IBM SPSS Statistics 25 software. Computation of tax avoidance is proxied by computing of Effective Tax Rates (ETR). Good corporate governance is proxied by the size of the board of directors and the audit committee, and executive compensation is proxied by all director compensations. The size of the audit committee is a total of the audit committee in one period. The size of the board of directors is the total of the board committee in one period. This study used ROA and Leverage as a control variable. In this study, it was found that executive compensation and good corporate governance, which was proxied by the Size of the board of directors and the Size of the audit committee shown a positive effect on tax avoidance. Investors who do not want tax avoidance must pay attention to executive compensation and good corporate governance in the company. In contrast, control variables have not significant effect on tax avoidance.
... The main reason for the conflict of interest lies in the information asymmetry between the board of directors and the executives, which may lead to moral hazard. The principal-agent theory and optimal contract theory advocate the design of incentive contract to achieve effective governance, such as the introduction of stock options, combination of explicit and implicit incentives, and so on [25,15,9]. However, Bebchuk [3] puts forward the managerial power theory, which challenges the traditional principalagent theory. ...
Focusing on the problem of CEO incentive and supervision, this paper constructs a three-party stochastic evolutionary game model of the CEO, compensation committee and audit committee, and analyzes the boundary conditions of the stability based on stochastic replicator dynamics equations. In addition, it carries out the numerical approximations with Taylor expansion and Ito^\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$It{\hat{o}}$$\end{document}-type stochastic differential equation, and further analyzes the influence of key variables on the direction and convergence rate of game players' strategy choice. The results show that: (1) The probability that the CEO takes self-interested behavior falls faster and the probability that audit committee adopts supervisory strategy rises faster when the self-interested behavior of the CEO gets larger. (2) The audit committee has a fast convergence rate, and arrives earlier in the neighborhood of the stochastically stable state where the incentive coefficient adopted by the compensation committee is larger. (3) The increase in supervision intensity increases the convergence rate of the CEO, but decreases the convergence rate of the compensation committee. (4) According to a comparative analysis of noise intensity, the influence of random interference on the decision-making of the audit committee is more volatile.
... Jensen and Meckling [13] believe that the introduction of stock options can link the interests of shareholders and executives which can reduce agency costs. Furthermore, while an agent pursues explicit incentives such as salary, implicit incentives such as reputation also play important roles, and they can be used as an alternative mechanism for explicit incentives to avoid moral hazard [14,15]. Schrader and Sun [16], Alvi [17], and Markus et al. [18] further studied the influence of executives' bounded rationality behaviour on the optimal incentive contract, introduced fairness preference and self-interested behaviour of senior executives into the principal-agent model, and extended research on the incentive theory of executive agents. ...
The process of CEO incentive and supervision, in which the special committee plays an important role, has always been a hard problem to solve in modern corporate governance. Considering the conflicts of interest between the compensation committee, audit committee, and the CEO, this paper constructed a game model of incentive and supervision within the board of directors and analysed the strategic choices of all three and the influencing mechanisms in different contexts. The results show that there is no totally stable strategy point in the system and that there are different strategy choices in different situations; the CEO’s strategy choice is influenced by both the compensation committee and the audit committee, the incentive strategy of the compensation committee will promote the CEO’s self-interested behaviour, and the supervision strategy of the audit committee is inhibitive. The function of the special committee is dependent on its initial intention and the intensity of action. In the situation of excessive incentive by the compensation committee, the strategy choice of audit committee has periodicity, and the CEO and audit committee have periodic discretionary choice game. This study provides insight into the internal governance of the board of directors, particularly special committees, which create the incentive and supervisory contracts.
... We use the nearest neighbour matching without replacement, employing a caliper distance of 0.03 to avoid bad matches. We analyse the differences in matching covariate balance between the EU and the non-EU banks, by following Focke et al. (2017) and compute the normalized differences in the pre-SACORD periods. 10 Results (not tabulated here but available on request) show that our matched samples are similar with respect to the treatment variables in both periods on all but one variable. ...
The paper examines how the Statutory Audit and Corporate Reporting Directives (SACORD) affect the compliance costs, risk taking and quality of financial reporting of the EU banks. Using a natural experiment, we find that post SACORD, both compliance costs and risk taking increase significantly. However, the implementation of additional regulations seems to be effective in terms of improved quality of financial reporting. When we analyse the impact by size, we find that smaller banks face disproportionately higher increase in compliance costs while larger banks seem to engage in greater risk taking.
... They found that the R & D subsidy program increased the possibility of patent applications, especially for smaller companies. Focke et al. (2016) analyzed the relationship between corporate reputation and executive compensation based on three methods: matched sample analysis, DID, and regression discontinuity design. Research showed that CEOs of well-known companies will earn less. ...
... We conduct two additional analyses to address the concern that our tests are merely detecting a residual size effect that is related to the client's general visibility. First, to account for the fact that our media measures could still proxy for high-order influences of firm size that are not captured by the linear influence of our control variables, we follow Focke et al. (2017) and include size splines based on the annual decile of firm size in our regressions. Second, we follow Hilary et al. (2014) and delete observations that have both bigger firm size and greater media coverage (i.e., those for which both MV and Media are greater than their sample median values). ...
We examine whether the media has an indirect corporate governance effect on financial reporting quality (FRQ) that operates through auditors. This occurs because greater media coverage can magnify an auditor’s business risk by exposing the auditor to more potential litigation and reputation damage if an audit failure occurs. We use a path analysis to examine the direct and indirect channels of media corporate governance. We find a positive association between media coverage and FRQ that is mediated by audit fees, and the results are stronger for firms with greater incentives to engage in earnings manipulation. In contrast, we find no evidence that the media has a direct corporate governance effect on FRQ. Our results show how the media’s corporate governance reach can be extended by auditors who care about how media coverage impacts their risk level.
... A positive β 4 and β 5 would suggest that by growing the firm with activities including finance lease transactions, executives in SOEs receive more compensation and government subsidies than executives in non-SOEs. The control variables are introduced referring to prior research and are defined in the Appendix (Focke et al., 2016;Wu et al., 2018;Faccio et al., 2006). The results are tabulated in Table 10. ...
The existing literature provides extensive evidence that firms intentionally structured lease arrangements to achieve off-balance-sheet accounting treatment prior to ASU 842 (FASB, 2016) and IFRS 16 (IASB, 2016). However, this study finds the opposite for Chinese state-owned enterprises (SOEs): compared to non-SOEs, SOEs in China have a higher tendency to use finance leases rather than operating leases. This result remains significant after we control for the possibility that Chinese capital providers are discriminatively extending credit to SOEs in the form of finance leases. We explain SOEs' preference for finance leases by their executives' empire building incentives. Such incentives are created by the executives' hunger for compensation, promotion and subsidies, which are determined by the government. Consistently, we find that SOEs' engagement in finance leases increases with their incentives to expand the firms' size. And indeed, SOE executives obtain more compensation and subsidies by growing their firms with finance leases. Finally, we find that SOEs with higher borrowing costs structure more finance lease arrangements. Such structuring further increases SOEs' financial leverage and, to some extent, decreases their corporate value. Taken together, these results suggest that the benefit of the ASU 842 (or IFRS 16), which aims to bring leased assets onto the balance sheet, may be impaired in situations where executives have strong incentives to build empires.
... A CEOs will not face higher possibility of dismissal when they receive higher level of remuneration. In contrast, the acquisition has no significant impact on the turnover of the CEO of the family business [8] [9] [10]. ...
... It is concluded that the higher the long-term managerial salary, the more significant the correlation between financial performance and social performance. However, after studying Fortune's ranking of America's most admired companies, Focke et al. [34] demonstrated that these firms' total compensation is on average 8% lower than others, indicating that managers are willing to trade off career benefits from working for a company that is publicly admired against additional monetary benefits. Li and Gu [35] concluded that the reduction in managerial compensation led to a more harmonious working environment and the improvement of CSR performance. ...
This paper uses the data of Corporate Social Responsibility (CSR) performance of A-share listed companies in China from 2013–2017 as sample to study on the impacts of managerial shareholding on CSR performance. By dividing the sample into mandatory disclosure group and voluntary disclosure group, we first empirically test the impacts of managerial shareholding on CSR performance. Then, we discuss the role of internal control quality in the impacts of managerial shareholding on CSR performance. Panel data models are employed in the empirical research and robust test. The empirical results show that: Firstly, in mandatory disclosure group, managerial shareholding has no significant impacts on CSR performance. In voluntary disclosure group, managerial shareholding has a positive impact on CSR performance. Secondly, in voluntary disclosure group, internal control quality has a positive role in the impacts of managerial shareholding on CSR performance, but this positive role cannot be supported empirically in mandatory disclosure group. Overall, these findings indicate that CSR performance is influenced by managerial shareholding and varies with CSR disclosure behaviors. The results of robust test also support this conclusion. Finally, we put forward that it would be a good choice for the companies to implement long-term equity incentives and improve internal control quality to promote CSR performance.
... Finally, our paper contributes to the broad literature on nonmonetary social comparisons and social rewards such as prestige and status. Focke, Maug, and Niessen-Ruenzi (2017) find that CEOs employed in America's most admired companies earn on average 8 % less and argue that working for a prestigious company creates an additional gain in utility, which can be extracted by pay concessions. Shi, Zhang, and Hoskisson (2017) propose that CEOs tend to respond to a competitor winning a CEO award by carrying out substantial acquisition activities in an effort to boost their own social recognition and status. ...
... Prestige of pedagogue's speciality is defined in the paper as "a complex concept that characterises a socially significant profession among other accepted professions in the state and includes a set of teachers' education and competences; working conditions; remuneration adequate to the tasks; professional autonomy (authority); and the ability to influence decision making" [12]. Scientific research about perception of prestige, the prestige of teaching [10], [3], [13] reveals relevance and novelty of theme, because on the lack of analogous research. ...
... 6 Frank (1985) indicates that employees are willing to accept lower monetary compensations in exchange for the employer's high status. Focke et al. (2017) find that CEOs of prestigious firms, as proxied by Fortune's ranking of America's Most Admired Companies (MAC), earn about 8% less on average than other CEOs of firms not listed on the MACA. 7 Market forces such as mergers and acquisitions among broker firms have little impact in China because the industry is closely regulated. ...
We investigate how a broker firm’s initial public offering (IPO) affects its analysts’ fiduciary duty of providing independent and objective recommendations. We find that the analysts of newly listed broker firms issue more positively biased recommendations in the first 2 to 3 years after their employers’ IPO than before the IPO. The increase in the recommendation bias is greater among analysts of affiliated brokers and brokers that raise additional capital after their IPO than among other analysts. Newly listed broker firms experience significant increases in revenue and trading commission, and the increases are positively related to recommendation bias, after controlling for many other factors. More importantly, recommendation bias decreases as newly listed broker firms season and as the importance of trading commission declines. This suggests that public exposure through a broker firm’s IPO does not enhance the integrity and professional conduct of its financial analysts. Rather, economic incentives make financial analysts more accepting of unethical behavior. The overall results imply that the public trading of financial gatekeepers compromises the ethical relationship between financial service professionals and society in general.
... We use the data item tdc1 to operationalize total compensation for the years before 2006 and the data item total_sec for the post-2006 time period. For measures of stock option pay, we use the Black-Scholes value of stock options (Black and Scholes 1973) for the pre-2006 years (opt_blk_valu) and its equivalent option_awards_fv (Focke et al. 2017) for the post-2006 years. All compensation variables are natural logged. ...
This paper investigates the impact of CEO excess compensation on corporate reputation. Past research has focused mainly on understanding how CEO overpayment is related to firm performance. As a consequence, we know relatively little about the implications of paying excess compensation for other important firm outcomes such as corporate reputation. By analyzing a sample of S&P 100 firms over the period 1995–2010, we show that overpayment in total compensation has a weak positive effect on a firm’s reputation while overpayment in stock options has a significant and negative impact on corporate reputation. Moreover, we find that the negative impact of CEO excess compensation in stock options is augmented if there has been a CEO change during the previous year, whereas this effect is lessened by CEO tenure. These results demonstrate that the relationship between excessive CEO compensation and corporate reputation is complex. It is influenced by the type of compensation and by specific CEO characteristics that invite greater public attention and scrutiny.
We show that those Chinese listed companies that are riding high on the media corporate social responsibility (CSR) ranking lists tend to have greater advertising (sales) expenses and poor environmental performance. This observation suggests that some companies opportunistically use media to greenwash their image, hoping to capture economic rents. Indeed, our evidence shows that greenwashing firms benefit in the lending market by exploiting the media to gain a kind of environmental, social, and governance (ESG) endorsement, thereby allowing them to achieve a lower cost of debt and to experience lower collateral obligations. The evidence suggests an adverse incentive to exploit ESG awareness via media coverage in weak institutional environments and opaque ESG disclosure regimes.
This study examines whether corporate reputation affects derivative hedging. We posit that high‐reputation firms are more likely to engage in hedging due to greater reputation costs and/or their commitment to lower financial risks. We find that high‐reputation firms are more likely to engage in hedging, especially when their hedging efforts or effects are more observable to stakeholders. We also find that high‐reputation firms are less likely to disclose the notional values of hedging positions and that interest rate hedging by high‐reputation firms is detrimental to firm value. Our results shed light on the impact of reputational concerns on corporate risk management and disclosure policies.
This article investigates the association between UK higher education institutions (HEIs) long- and short-term performance measures, and the pay of vice-chancellors/principals (VCs) in an era of intense neoliberalism/financialisation of HEIs, and consequently ascertains the extent to which the VC pay–performance nexus is moderated by VC characteristics. Using a longitudinal sample of UK HEIs, our baseline findings suggest that HEIs that prioritise meeting long-term social performance targets tend to pay their VCs low pay packages, whereas HEIs that focus on achieving short-term reputational performance targets pay their VCs high pay packages. We show further that the VC pay–performance relationship is moderated/explained largely by VC characteristics. Our findings are robust to controlling for alternative governance mechanisms, endogeneities, alternative performance measures and different estimation techniques. Our findings offer empirical support for optimal contracting and prestige theories with significant implications for the sector.
Using a unique sample of Chinese business group firms required by the government to disclose double financial statements to the parent and its subsidiaries, we examine the impact of a decentralized power structure on executive compensation and further test its mechanism. Our findings show that firms with a more decentralized power structure pay their group managers less, suggesting that such a power structure acts as a governance tool to mitigate astronomical salaries in the Chinese manager market. Additional analysis shows that management's bargaining power mitigates this negative relationship, whereas the information and competition environments reinforce this negative relationship. The main results are robust to an alternative decentralized power structure and executive compensation metrics, an instrumental variable approach, and propensity score matching. Furthermore, we document that firms with a decentralized power structure offer managers fewer stock options and less abnormal compensation, and managers respond by increasing the probability of leaving their jobs. Our results suggest that the allocation of decision rights determines executive compensation.
Research Question/Issue:
We examine the role of corporate executives in dividend tunneling activity by controlling shareholders, and whether the correlation between executive ownership and dividend tunneling is influenced by internal and external governance mechanisms.
Research Findings/Insights:
We find increased managerial ownership may lead to a higher level of dividend tunneling. This is further strengthened by our finding that the positive effect of executive ownership on dividend tunneling is more pronounced for firms with weaker minority shareholder protection. In addition, our results show that higher degrees of state ownership may further intensify this positive association. Finally, we find that analyst coverage has a moderating effect and constrains the collusion between controlling shareholders and executives in dividend tunneling activity.
Theoretical/Academic Implications:
Our study contributes to the literature on the role of managerial ownership in controlling shareholders’ dividend tunneling activity. We fill a gap in the literature on the corporate agency problem by providing evidence that dividends have been employed by controlling shareholders as a means of tunneling, and that executives with higher ownership are more likely to collude with controlling shareholders in dividend tunneling activities.
Practitioner/Policy Implications:
This study contributes to the debates around the promotion of the cash dividend policy in China, as our findings show that cash dividends are used as a tunneling vehicle. Providing important evidence to regulators, our findings support the argument that external monitoring by financial analysts can effectively constrain dividend tunneling by dominant shareholders, especially in the context of emerging stock markets with high ownership concentration, weak minority shareholder protection, and an underdeveloped legal system.
Firm prestige reduces the cost of bank loans. Specifically, when borrowers are included in Fortune’s list of ‘America’s Most Admired Companies' (MAC), their loan costs decline by approximately 12.3 bps on average. The effect appears causal. The negative relation between prestige and loan costs is more pronounced for borrowers in more competitive industries and with higher information uncertainty. Banks with weaker bargaining power offer favorable loan terms to the MAC ranked borrowers when they face a high degree of competition from other banks. The MAC ranking appears to be used by these banks as a summary statistic for loan quality in the face of competition.
This paper investigates the effect of the quality of environmental information disclosure of firms on their bank financing and further examines the moderating effect of formal and informal institutions on this effect using China as a laboratory. We find that the quality of environmental information disclosure is positively (negatively) related to the scale (cost) of bank financing. Furthermore, the formal institution (proxied by the official issuance of the Green Credit Guidelines) strengthens the above relationship. Moreover, the informal institution (proxied by bank connection) weakens the association between the quality of environmental information disclosure and bank financing. Our results are valid after addressing the potential endogeneity between environmental information disclosure and bank financing and remain unchanged in various robustness tests. Our findings affirm the decision usefulness of corporate environmental information disclosure that can be used by companies as an effective strategy for obtaining bank financing and the ethical integrity of borrowers to banks as an important group of capital market participants.
Purpose
The purpose of this paper is to investigate the impact of firm-specific (i.e. firm size, profitability, leverage, dividend, growth opportunities, management quality and firm age) and country-specific (i.e., gross domestic product [GDP] growth) variables on compensation/remuneration offered to chief executive officers (CEOs) working in different industries of Pakistan.
Design/methodology/approach
Panel data techniques, namely, pooled ordinary least squares, fixed effects and random effects methods are used to estimate the results. Moreover, Hausman test is used to choose which estimation method, either fixed effects or random effects, is better to explain the results.
Findings
Firm size, profitability, leverage, growth opportunities and age are some important firm-specific factors that have mixed (i.e. positive/negative) impact on CEO compensation in different industries. Variations in results are due to industry dynamics. However, it is important to mention that three key variables, namely, dividend, management quality and GDP growth have shown consistent positive impact on CEO compensation in most of the industries. In sum, results show that firm-specific and country-specific variables have material effects on CEO compensation. Moreover, results are found consistent with the predictions of agency theory and human capital theory.
Practical implications
The authors are sure that findings of this study provide some support to the board of directors to determine the pay slice for CEOs. Moreover, findings provide support to the regulatory authorities in formulating mechanisms to determine the compensation package for CEOs working in different industries and to improve the Code of Corporate Governance.
Originality/value
To the best of the authors’ knowledge, no empirical study in Pakistan has yet estimated the effects of firm-specific and country-specific variables on compensation offered to CEOs working in different industries. Thus, industry-wise analysis provides some new insights to the decision-makers and lays some foundation upon which a more detail analysis could be based.
In this study, we examine the effect of media spotlight of corporate environmental, social, and governance (ESG) performance on corporate debt financing. We use the most influential media firm’s rankings of corporate ESG performance from 2009 to 2017 as a proxy of media spotlight. Positive media ESG spotlight significantly reduces firms’ cost of debt through enhancing reputation in supply chains, reducing financial risk and increasing corporate transparency. Media ESG spotlight plays a more important role for firms with poor corporate governance and firms located in provinces with more serious pollution.
This study investigates whether mandatory corporate social responsibility (CSR) reporting ameliorates liquidity and reduces risk for stocks. Moreover, we explore whether these impacts vary with regulated company category and stakeholder influence capacity. For a mandatory CSR reporting regulation in Taiwan, we assess the policy's effects using difference-in-differences (DID) modeling. The results show that mandatory CSR reporting significantly increases liquidity and reduces idiosyncratic risks. However, the effect on systematic risk is asymmetric-a high (low) systematic risk is accompanied by a positive (negative) market return; namely, a large (small) price increase (decrease) caused by a positive (negative) market return. This aligns with the insurance-like benefits argument. These findings suggest investors hold on to CSR firms because of increased information transparency and good financial performance during a recession. The improved liquidity is more significant for firms in the electronics and chemical industries and for firms with a large equity share owned by domestic institutional investors. Idiosyncratic risk is reduced more for the latter two. The findings provide feedback on mandatory CSR reporting to policy makers and provide reference for firms and investors.
The major goal of this study is to see how the behavioral dominance of executives in publicly traded businesses affects performance. Empirical tests were conducted on panel data from FTSE 100 businesses. In order to address this research question, we looked at the relationship between governance and the stock market in the first chapter. . Then, using financial theories as a foundation, we developed hypotheses about the impact of salary, board size, women on the board, and board independence on performance.
The empirical findings show that the importance of pay has a favorable impact on performance. The size of the Board of Directors and the duality of function, on the other hand, had negative effects on performance, according to the empirical testing.
This paper complements the literature on green finance by probing whether air pollution matters for CEO compensation. Using a sample covering 240 cities in 31 provinces in China from 2005 to 2017, we document a positive association between air pollution and CEO compensation. These findings indicate that firms headquartered in areas with unhealthy air compensate their CEOs with higher pay than those headquartered in areas with better air quality. Moreover, two potential channels are validated to interpret the positive pollution‐pay linkage: income comparison and executive shortage. Finally, we show that air pollution attenuates the pay‐performance sensitivity, indirectly confirming an essential role of the living environment in determining CEO compensation.
Executives’ status is increasingly recognized as an important factor in firms’ decision-making, while the way executives’ perception of their status influences firms’ strategy is underexplored. Building on insights from both upper echelons and psychological studies, this study investigates the effect of entrepreneurs’ self-perceived social status on firms’ philanthropy. Using a sample of Chinese private firms, we find that entrepreneurs’ self-perceived social status positively affects firms’ donations by drawing their attention to the benefits of philanthropy and enhancing their altruism values. However, such relationships are weakened for entrepreneurs who know about awards related to CSR and firms that join a business association that values CSR; this shows that external information about the value of CSR reduces the effect of entrepreneurs’ self-perceived social status. Our findings highlight the importance of executives’ self-perceived social status, offering important implications for both CSR and upper echelons research.
Combining the data of executive compensation of Chinese listed companies and urban livability from 2009 to 2016, this study explores the relationship between executive pay of listed firms and urban livability of the city where the firm is based. We find executive pay drops as urban livability gradually improves, showcasing urban livability's compensation effects on executive pay at firms at the city. At the mean value of the samples, each unit increase in urban livability will reduce executive pay by 30.8%. This study further analyzes the heterogeneity in terms of company size, company age, bargaining ability, ownership property and industry characteristics of the company. The results show that the executive pay is more sensitive to the change of urban livability in larger companies, older enterprises, state-controlled firms, companies with weak bargaining power, and enterprises receiving preferential industrial policy. To mitigate potential endogeneity of urban livability and executive pay, we use earthquake number as the instrumental variable for urban livability, and the results are consistent with the benchmark regression results. This study not only contributes to literature on nonmonetary incentives in executive pay but is of practical significance in cost-benefit analysis of urban livability improvement in developing countries.
Drawing on stakeholder and agency theories, we examine how employee friendly practices impact dividend payments in emerging countries. Using data from 862 firms and 6,071 firm-year observations from 17 emerging countries, we find that the employee friendly practices are negatively related to the dividend payments. This relationship is found to be stronger for government owned firms. We further examine the ‘agency problems’ and ‘future investment’ as possible channels through which employee friendly practices may lead firms to pay low dividends. We find the support for the future investment channel. Lastly, we examine the value effect of employee friendly treatment and find that employee friendly practices increase firm performance in emerging markets which lends support to the effectiveness of the investment channel.
This paper examines the impact of financial reporting practices on corruption obstacles for about 150,000 firms across 143 mostly developing countries from 2006 to 2019. We document a strong positive relationship between the production of audited financial statements (AFS) and corruption obstacles (CO) faced by the firm. We argue that in a corrupt business environment, rent-seeking bureaucrats use the credible financial information to optimize their bribe demands. Our baseline results remain robust after addressing endogeneity concerns. We further show that country-level institutional quality has a moderating effect on the AFS-CO relation. The evidence from surveying entrepreneurs also provides qualitative support for our empirical findings. Our study sheds light on a previously under-explored adverse consequence of transparency - exposure to corrupt bureaucrats where institutions are weak.
Does earnings management, even though legal, hinder investor trust in reported earnings? Or do investors regard earnings management as a way for firms to convey private information, or simply as a neutral feature of financial reporting? We find that past abstinence from earnings management increases investor responses to future earnings surprises. Importantly, this effect occurs in industries where investor trust has recently been violated, and where managers would in the past have had incentives and opportunities to misrepresent earnings. Overall, investors seem to interpret the extent to which management resists temptations for misreporting as a “litmus test” of trustworthiness.
This article is protected by copyright. All rights reserved
Although it is assumed that CEOs attempt to use corporate reputation ratings to justify increases in their annual compensation, controversy persists on the relationship between corporate reputation ratings and CEO compensation. Based on agency theory and signaling theory, we predict a positive relationship between corporate reputation ratings and CEO compensation but only during periods of economic recovery. Using a subset of Fortune’s “Most Admired” companies, this study demonstrates that corporate reputation ratings are significantly associated with CEO compensation during periods of economic recovery but not during periods of economic recession, after controlling the potential extraneous factors that may influence CEO pay.
This chapter aims to explain the theoretical foundations of the fair CEO compensation framework. It is structured as follows: first, the fairness and fair pay concepts are introduced, then the prominent and most pertinent theories and school of thoughts regarding compensation and fair and optimal pay are presented in Sects. 2.1 and 2.2, respectively. Finally, how it can be applied or how it has been applied to the practice is illustrated in Sect. 2.3.
In this chapter, the fifth aspect of the “Fair CEO Compensation” octagonal framework, “Compensation according to the Characteristics, Competence, and Individual Performance (CCIP)” is introduced. First, the theoretical concept and the link between CCIP and total CEO compensation are illustrated, then practitioners’ viewpoints on individual performance (IP) and the implementation of the IP criterion into the remuneration policy are represented.
The disciplinary role of the financial market could interact with a firm's choice of internal corporate governance. We prove that when the efficiency of the initial public offering (IPO) pricing improves, entrepreneurs choose stronger corporate governance structures as way of committing to extract fewer private benefits in exchange for higher prices. Using a difference-in-difference method that exploits the asymmetric impacts of the IPO pricing deregulation on the Chinese mainland and Hong Kong markets, we find that improving the efficiency of IPO pricing has a positive impact on a firm's corporate governance quality. This impact is more pronounced for firms with lower tangibility, for firms with higher market-to-book ratios, and for state-owned enterprises. Our findings demonstrate that the development of the financial market can promote economic development through improving corporate governance.
After decades of de-prioritizing shareholders’ economic interests and low corporate profitability, Japan introduced the JPX-Nikkei400 in 2014. The index highlighted the country’s “best-run” companies by annually selecting the 400 most profitable of its large and liquid firms. We find that managers competed for inclusion in the index by significantly increasing return on equity (ROE), and they did so at least in part due to their reputational or status concerns. The ROE increase was predominantly driven by improvements in margins, which were in turn partially driven by cutting research and development (R&D) intensity. Our findings suggest that indexes can affect managerial behavior through reputational or status incentives.
Using multiple measures of attack proximity, we show that CEOs employed at firms located near terrorist attacks earn an average pay increase of 12% after the attack relative to CEOs at firms located far from attacks. CEOs at terrorist attack-proximate firms prefer cash-based compensation increases (e.g., salary and bonus) over equity-based compensation (e.g., options and stocks granted). The effect is causal and it is larger when the bargaining power of the CEO is high. Other executives and workers do not receive a terrorist attack premium.
We examine how firms' dividend policy affects the initial compensation of their newly appointed CEOs. We focus on newly appointed CEOs to isolate the effect of dividends on compensation and to provide new insights into an aspect largely neglected by compensation research. We show that the dividend payout is positively related to new CEO compensation. Further, the positive effect of dividends is stronger for firms with no dividend cuts over the past two, three and four years, firms with relatively high institutional ownership, and those with strong boards, consistent with new CEOs receiving higher pay as compensation for greater dividend pressure.
The importance of board committees – specialized subgroups that exist to perform many of the board's most critical functions, such as setting executive compensation, identifying potential board members, and overseeing financial reporting – has grown over time due to increased legal requirements and greater complexity of the environment in which firms operate. This has resulted in a large body of work examining board committees across the accounting, finance, and management disciplines. However, this research has developed rather independently within each discipline, preventing scholars and practitioners from developing a comprehensive understanding of board committees. To address this issue, we conduct a comprehensive review of the literature that: 1) summarizes and synthesizes antecedents and outcomes associated with board committees in publicly‐traded firms in English common law countries; and 2) offers a critical analysis of existing research, providing recommendations for advancements and new directions in board committee research.
This article is protected by copyright. All rights reserved.
We examine whether, how, and why acquirer shareholder voting matters. We show that acquirers with low institutional ownership, high deal risk, and high agency costs are more likely to bypass shareholder voting. Such acquirers have lower announcement returns and make higher offers than those who do not. To avoid a shareholder vote, acquirers increase equity issuance and cut payouts to raise the portion of cash in mixed-payment deals. Employing a regression discontinuity design, we show a positive effect on acquirer announcement returns concentrated in acquirers with higher institutional ownership. We conclude that shareholder voting mitigates agency problems in corporate acquisitions.
Received April 18, 2017; editorial decision February 9, 2018 by Editor David Denis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
This paper studies how directors' reputational concerns affect board structure, corporate governance, and firm value. In our setting, directors affect their firms' governance, and governance in turn affects firms' demand for new directors. Whether the labor market rewards a shareholder-friendly or management-friendly reputation is determined in equilibrium and depends on aggregate governance. We show that directors' desire to be invited to other boards creates strategic complementarity of corporate governance across firms. Directors' reputational concerns amplify the governance system: strong systems become stronger and weak systems become weaker. We derive implications for multiple directorships, board size, transparency, and board independence.
This paper analyzes stock option awards to CEOs of 792 U.S. public corporations between 1984 and 1991. Using a Black-Scholes approach, I test whether stock options' performance incentives have significant associations with explanatory variables related to agency cost reduction. Further tests examine whether the mix of compensation between stock options and cash pay can be explained by corporate liquidity, tax status, or earnings management. Results indicate that few agency or financial contracting theories have explanatory power for patterns of CEO stock option awards.
This paper studies optimal incentive contracts when workers have career concerns--concerns about the effects of current performance on future compensation. The authors show that the optimal compensation contract optimizes total incentives: the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract. Thus, the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers. The authors find empirical support for this prediction in the relation between chief-executive compensation and stock-market performance. Copyright 1992 by University of Chicago Press.
We find that institutional ownership concentration is positively related to the pay-for-performance sensitivity of executive compensation and negatively related to the level of compensation, even after controlling for firm size, industry, investment opportunities, and performance. These results suggest that the institutions serve a monitoring role in mitigating the agency problem between shareholders and managers. Additionally, we find that clientele effects exist among institutions for firms with certain compensation structures, suggesting that institutions also influence compensation structures through their preferences.
We examine the effects of nonmonetary benefits on overall executive compensation from the perspective of the living environment at the firm headquarters. Companies in polluted, high crime rate, or otherwise unpleasant locations pay higher compensation to their chief executive officers (CEOs) than companies located in more livable locations. This premium in pay for quality of life is stronger when firms face tougher competition in the managerial labor market, when the CEO is hired from outside, and when the CEO has short-term career concerns. Overall, the geographic desirability of the corporate headquarters is an effective substitute for CEO monetary pay.
Several matching methods that match all of one sample from another larger sample on a continuous matching variable are compared with respect to their ability to remove the bias of the matching variable. One method is a simple mean-matching method and three are nearest available pair-matching methods. The methods' abilities to remove bias are also compared with the theoretical maximum given fixed distributions and fixed sample sizes. A summary of advice to an investigator is included.
I study the effect of CEO optimism on CEO compensation. Using data on compensation in US firms, I provide evidence that CEOs whose option exercise behavior and earnings forecasts are indicative of optimistic beliefs receive smaller stock option grants, fewer bonus payments, and less total compensation than their peers. These findings add to our understanding of the interplay between managerial biases and remuneration and show how sophisticated principals can take advantage of optimistic agents by appropriately adjusting their compensation contracts.
Executive equity compensation in the U.S. is evolving. At the turn of the millennium, stock options dominated the equity pay landscape, accounting for over half of the aggregate ex ante value of senior executive pay at large public companies, while restricted stock and similar compensation accounted for only about ten percent. Beginning in 2006, stock grants have displaced options as the single largest component of senior executive compensation at these firms. Accompanying this shift has been increased variation among companies in their relative emphasis on stock and options in equity pay packages. Both phenomena provide an opportunity for a rich exploration of executive pay contracting focusing specifically on equity pay design. Such an exploration is timely given the current focus in Washington on the relationship between equity compensation and corporate risk taking. This article begins that exploration and has two primary aims. First, it describes the evolution in executive equity pay practices and the current equity compensation landscape. Second, it considers the extent to which this evolution and the current use of stock and option pay can be explained as a function of efficient contracting (and what 'efficient contracting' means in this context). The analysis reveals several features of the executive equity pay landscape that suggest limitations on efficient compensation contracting. First, although directionally consistent with changes in the conventional economic determinants of equity pay design, the dramatic shift over the last decade from very heavy reliance on options to a more balanced emphasis on stock and options suggests that option expensing, option taint, and/or increased perceived option risk played leading roles. Second, the tri-modal distribution of the mix of stock and options being granted in recent years suggests that optimizing incentives is not the sole consideration of issuing firms. Third, the extent to which the same mix of stock and options is granted to the various member of the executive suite suggests that individual optimization is quite limited.
We use a well-developed dynamic panel GMM estimator to alleviate endogeneity concerns in two aspects of corporate governance research: the effect of board structure on firm performance and the determinants of board structure. The estimator incorporates the dynamic nature of internal governance choices to provide valid and powerful instruments that address unobserved heterogeneity and simultaneity. We re-examine the relation between board structure and performance using the GMM estimator in a panel of 6,000 firms over a period from 1991-2003, and find no causal relation between board structure and current firm performance. We illustrate why other commonly used estimators that ignore the dynamic relationship between current governance and past firm performance may be biased. We discuss where it may be appropriate to consider the dynamic panel GMM estimator in corporate governance research, as well as caveats to its use.
This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research.
The propensity score is the conditional probability of assignment to a particular treatment given a vector of observed covariates. Both large and small sample theory show that adjustment for the scalar propensity score is sufficient to remove bias due to all observed covariates. Applications include: (i) matched sampling on the univariate propensity score, which is a generalization of discriminant matching, (ii) multivariate adjustment by subclassification on the propensity score where the same subclasses are used to estimate treatment effects for all outcome variables and in all subpopulations, and (iii) visual representation of multivariate covariance adjustment by a two-dimensional plot.
This article develops a framework for efficient IV estimators of random effects models with information in levels which can accommodate predetermined variables. Our formulation clarifies the relationship between the existing estimators and the role of transformations in panel data models. We characterize the valid transformations for relevant models and show that optimal estimators are invariant to the transformation used to remove individual effects. We present an alternative transformation for models with predetermined instruments which preserves the orthogonality among the errors. Finally, we consider models with predetermined variables that have constant correlation with the effects and illustrate their importance with simulations.
This chapter summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.
We use a bargaining framework to examine empirically the relations between director compensation and board-of-director independence. Our evidence suggests that independent directors have a bargaining advantage over the CEO that results in compensation more closely aligned with shareholders’ objectives. Firms with more outsiders on their boards award directors more equity-based compensation. When the CEO's power over the board increases, compensation provides weaker incentives to monitor. Firms with more inside directors and with entrenched CEOs use less equity-based pay. Furthermore, firms with entrenched CEOs and CEOs who also chair the board are less likely to replace cash pay with equity.
This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized
method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our
GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation
in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables.
We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying
restrictions and Hausman specification tests.
I study large charitable stock gifts by Chairmen and Chief Executive Officers (CEOs) of public companies. These gifts, which are not subject to insider trading law, often occur just before sharp declines in their companies' share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs fraudulently backdate stock gifts to increase personal income tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares.
There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance
is poor relative to the industry average. However, CEOs are also more likely to be replaced if the industry is doing badly. We show that these empirical patterns are natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics, and where industry conditions affect the outside options of both managers and firms. Our model also has several new predictions about the type of replacement manager, and their pay and performance. We construct a dataset which describes all turnover events during the period 1992-2006 and show that these predictions are also born out empirically.
Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm's security holders. One outcome has been the development of “behavioral” and “managerial” theories of the firm which reject the classical model of an entrepreneur, or owner-manager, who single-mindedly operates the firm to maximize profits, in favor of theories that focus more on the motivations of a manager who controls but does not own and who has little resemblance to the classical “economic man.” Examples of this approach are Baumol (1959), Simon (1959), Cyert and March (1963), and Williamson (1964b). More recently the literature has moved toward theories that reject the classical model of the firm but assume classical forms of economic behavior on the part of agents within the firm. The firm is viewed as a set of contracts among factors of production, with each factor motivated by its self-interest. Because of its emphasis on the importance of rights in the organization established by contracts, this literature is characterized under the rubric “property rights.” Alchian and Demsetz (1972) and Jensen and Meckling (1976b) are the best examples. The antecedents of their work are in Coase (1937, 1960). The striking insight of Alchian and Demsetz (1972) and Jensen and Meckling (1976b) is in viewing the firm as a set of contracts among factors of production.
Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
The paper uses a simple multitask career concern model in order to analyse the incentives of government agencies' officials.
Incentives are impaired by the agency pursuing multiple missions. A lack of focus is even more problematic in the case of
fuzzy missions, that is when outsiders are uncertain about the exact nature of the missions actually pursued by the agency.
Consequently agencies pursuing multiple missions receive less autonomy.
The paper further shows that professionalization creates a sense of mission for the agency, and that the specialization of
officials raises their incentives. Last, the paper compares its predictions with the stylized facts on Government bureaucracies.
This paper develops the method of matching as an econometric evaluation estimator. A rigorous distribution theory for kernel-based
matching is presented. The method of matching is extended to more general conditions than the ones assumed in the statistical
literature on the topic. We focus on the method of propensity score matching and show that it is not necessarily better, in
the sense of reducing the variance of the resulting estimator, to use the propensity score method even if propensity score
is known. We extend the statistical literature on the propensity score by considering the case when it is estimated both parametrically
and nonparametrically. We examine the benefits of separability and exclusion restrictions in improving the efficiency of the
estimator. Our methods also apply to the econometric selection bias estimator.