Corporate governance and firm value as determinants of CEO compensation in Taiwan: 2SLS for panel data model

Abstract

Purpose

The main purpose of this paper is to examine the relationships among chief executive officer (CEO) compensation, ownership and firm value. In addition, the determining factors of CEO compensation are examined.

Design/methodology/approach

This model is applied to data of the Taiwan stock market for 1995‐2004. The paper applies a two‐stage least squares regression for the panel data model and implements an F‐test, LM test and Hausman test to determine the best statistical method (that is, ordinary least squares method, fix effects model or random effects method).

Findings

The results offer some important insights that show CEO compensation, CEO ownership and firm value are interdependent. Firm size, board size, firm value, institution ownership and CEO ownership are positively associated with CEO compensation while firm age, research and development expenditure rates and firm risk are negatively associated with CEO compensation.

Practical implications

The on‐going expansion in the scale of the firm depends on managers having specialized knowledge. In particular, managers are responsible for the firm's entire operational conditions and future investment strategy. Providing an incentive compensation package can reduce agency costs between managers and shareholders. These findings also provide Taiwanese listed companies with a lesson, which suggests that the existence of the monitoring system can reduce the need for incentive alignment.

Originality/value

The study relies on data from publicly traded Taiwan firms, covering a ten‐year period. This study uses a simultaneous equation estimation procedure to investigate the relations among CEO compensation, CEO ownership and firm value. Two proxies for effective monitoring – board size and institutional ownership – are used. The paper attempts to discuss the influence on CEO compensation from the existence of the monitoring system.

Citation

Lee, S. and Chen, H. (2011), "Corporate governance and firm value as determinants of CEO compensation in Taiwan: 2SLS for panel data model", Management Research Review, Vol. 34 No. 3, pp. 252-265. https://doi.org/10.1108/01409171111116286