The Increase in CEO Pay After Large Investments: Is it Purely Rent Extraction?
Abstract
Purpose
The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms is investigated.
Design/Methodology/Approach
A sample of firms that make large corporate investments is identified. For this sample, we identify the change in CEO pay before and after the investment, and we also measure the pay-for-size sensitivity of these investing firms.
Findings
For firms that make large corporate investments, CEOs get significantly more option grants when their firms’ stock returns are negative after the investments and these investing CEOs get more option grants than noninvesting CEOs.
Research Limitations/Implications
The present study suggests that firms may have to increase CEO pay after large corporate investments to encourage investment. However, the results may also be consistent with an agency cost explanation. Future research should try to distinguish between the two explanations.
Social Implications
The study reveals a potential way to prevent CEOs from underinvesting.
Originality/Value
The study provides important insights to shareholders on how to encourage CEOs to get their firms to invest, and on how to view CEO pay increases after their firms invest.
Keywords
Acknowledgements
Acknowledgments
We thank Matt Billett, Jon Garfinkel, Erik Lie, Dave Mauer, John McInnis, Ashish Tiwari, and Anand Vijh for helpful comments and suggestions. We also thank seminar participants at University of Iowa, SUNY-Buffalo, Penn State – Great valley, University of New Hampshire, University of Texas at El Paso, and Marquette University. All errors are our responsibility.
Citation
Jiang, Z., Kim, K.A. and Zhang, Y. (2014), "The Increase in CEO Pay After Large Investments: Is it Purely Rent Extraction?", Advances in Financial Economics (Advances in Financial Economics, Vol. 16), Emerald Group Publishing Limited, Leeds, pp. 1-44. https://doi.org/10.1108/S1569-3732(2013)0000016001
Publisher
:Emerald Group Publishing Limited
Copyright © 2013 Emerald Group Publishing Limited