Executive directors' pay-performance link and board diversity: evidence from high free cash flow and low-growth firms

Abstract

Purpose

The purpose of this study is to examine whether board diversity can attenuate weaker executive directors' pay-performance link in high free cash flow and low-growth firms (HFCF_LGRW).

Design/methodology/approach

This study employed the Malaysian dataset from 2005 till 2016 and the fixed-effect model to investigate the developed hypotheses. The two-stage least squares method (2SLS) is employed to mitigate endogeneity issues.

Findings

This study finds that a positive association between executive directors' pay and firm performance is weaker in HFCF_LGRW firms. However, board diversity, namely ethnic and gender diversity, can mitigate weaker executive directors' pay-performance link, indicating effective monitoring.

Originality/value

This study is among the first to reveal that executive directors' pay-performance link is weaker in firms with HFCF_LGRW growth, consistent with Jensen's (1986) free cash flow hypothesis. However, findings suggest that this agency problem in HFCF_LGRW firms is attenuated by board diversity, namely ethnic and gender diversity. This supports the notion that diversity in corporate boards serves as an effective internal monitor.

Citation

Tee, C.M. (2023), "Executive directors' pay-performance link and board diversity: evidence from high free cash flow and low-growth firms", International Journal of Emerging Markets, Vol. 18 No. 9, pp. 2477-2500. https://doi.org/10.1108/IJOEM-11-2020-1379