Search results

We investigate the relationship between chief executive officer (CEO) compensation and a firm's financial performance in the insurance industry to determine CEO pay policies that are more effective in promoting specific financial corporate goals.

Considering different components of executive pay, we investigate the latter’s relationship with the corporate performance of the insurance industry using the generalized method of moments (GMM) model developed for dynamic panel estimation. Our data encompasses the periods before and after the 2008 financial crisis.

We observe that after the crisis the insurance industry experienced a major change in executives’ compensation packages. While CEOs’ compensation was primarily based on bonuses pre-crisis, the average size of the bonus was reduced to one-third of the level, stock awards and nonequity incentives were doubled and option awards increased almost 70 percent in the post-crisis period. It is also evident that the work experience of CEOs and the firm's financial performance play a significant role in determining CEO compensation. As the CEO becomes more experienced, stock awards and option awards replace cash bonus.

The paper finds supporting evidence for the agency-related problem in the insurance industry and the convergence of interest hypothesis, suggesting that a firm's market valuation rises as its managers own an increasingly large portion of the firm. To align the interest of owners with that of management, managers should be converted into owners via stock ownership. The paper addresses a topical issue regarding pay and performance and the effect of the financial crisis in the insurance industry.

There is some evidence that firms appoint internal candidates to exploit their unique firm specific knowledge and that the type of appointments may have signaling value to the market. However, these studies are limited to chief executive officer appointments whereas other top executives could also play an important role in corporate decision making. The purpose of this paper is to focus on the chief financial officer (CFO) appointments and firm’s debt-equity choice.

The authors employ a multiple regression framework. To control for potential endogeneity, the authors use an instrumental variable approach with both two-stage least squares and generalized method of moments estimators.

The authors find that firms with internal CFO hires issue more equity than firms that hire from the external labor market. The authors also find that internal CFOs significantly reduce information asymmetry (IA), which may lower market risk and the cost of financing through equity issues. Furthermore, consistent with the value maximizing role of reduced IA the authors find that this effect is concentrated in value firms. In firms with higher IA this preference for equity by the internal CFO may be weaker as even internal CFOs will prefer debt financing for its disciplining role and to reduce IA. A subsample analysis with growth firms shows this diminishing impact on the financing choice of an internal CFO.

This study provides important information about the influence the CFO has on a firm’s capital structure decisions.