The Effect of CEO Pay on Firm Valuation in Closely Held Firms

Abstract

We collect data on CEO pay in 122 closely held firms traded on the Tel-Aviv Stock Exchange during 1995–2001. After estimating CEO pay performance sensitivity and CEO “excess pay,” we examine how these two pay attributes affect end of period (year 2001) Tobin's Q. Our main findings and conclusions are that (1) when CEO is from the controlling family, the end of period Q is negatively correlated with “excess” pay – “excess” pay to family-CEOs appears like a form of private benefits; (2) when a professional nonowner CEO runs the firm, end of period Q is positively correlated with CEO pay performance sensitivity – incentives to professional CEOs help promote firm value.

Citation

Barak, R., Cohen, S. and Lauterbach, B. (2011), "The Effect of CEO Pay on Firm Valuation in Closely Held Firms", John, K. and Makhija, A.K. (Ed.) International Corporate Governance (Advances in Financial Economics, Vol. 14), Emerald Group Publishing Limited, Leeds, pp. 19-42. https://doi.org/10.1108/S1569-3732(2011)0000014004