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The purpose of this paper is to investigate whether CEO pay is related to stock price crash risk, and how ownership concentration mediates this relationship.
Abstract
Purpose
The purpose of this paper is to investigate whether CEO pay is related to stock price crash risk, and how ownership concentration mediates this relationship.
Design/methodology/approach
The authors hypothesize that companies who disclose CEO pay would experience lower stock price crash risk than their non-transparent peers. For companies whose CEO pay is published, the authors conjecture that the CEO pay slice is positively related to stock price crash risk. The authors also investigate whether the impact of CEO pay on crash risk would be weaker or stronger under a concentrated ownership structure and a mutual fund ownership structure. This study relies on 14,499 firm-year observations from the Chinese capital market to shed light on these questions.
Findings
The authors demonstrate that the magnitude of CEO pay slice has little effect on stock price crash risk. However, whether CEO pay is disclosed at all is a strong indicator for stock price crash risk.
Originality/value
The paper expands on the literature by adding a new factor to explain the stock price crash risk, which is vital to investor protection and the stability of the financial market. The research also adds to the sparse literature on CEO centrality and has implications for corporate governance and public policy.
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James A. Chyz and Scott D. White
This paper takes a unique approach to provide additional insight into the agency view of tax avoidance. We directly investigate the association between the presence of agency…
Abstract
This paper takes a unique approach to provide additional insight into the agency view of tax avoidance. We directly investigate the association between the presence of agency conflicts and corporate tax avoidance. Using a measure of CEO centrality, developed by Bebchuk, Cremers, and Peyer (2011), we identify settings in which agency conflicts are likely to be high. In contrast to prior literature, our primary tests do not rely on the inferences of market participants regarding tax avoidance. We find that CEO centrality is positively and significantly associated with tax avoidance. Additionally, we analyze the mediating role of monitoring by institutional investors in our setting. We find that the relation between tax avoidance and the existence of agency conflicts is strongest for firms with low levels of CEO monitoring. We also add to prior literature by investigating the implications of our setting on future accounting performance and future firm value.
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Hoa Luong, Abeyratna Gunasekarage and Syed Shams
This paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.
Abstract
Purpose
This paper investigates the influence of tournament incentives, measured by Chief Executive Officer (CEO) pay slice (CPS), on the acquisition decisions of Australian firms.
Design/methodology/approach
This study applies ordinary least squares regression analyses to a sample of 1,429 acquisition observations announced by 986 unique Australian firms spanning the 2001–2015 period. Event study methodology was employed to capture the market reaction to acquisition announcements. Multinomial logit models, a two-stage least squares instrumental variable (IV) approach and propensity score matching (PSM) technique were performed for robustness and endogeneity correction purposes.
Findings
The results suggest that CPS has a positive and significant relationship with the announcement period abnormal return realised by acquirers, implying that executives are motivated to exert best efforts and support the CEO in making value-creating acquisitions. Further analyses reveal that management teams of high CPS firms demonstrate efficiencies in executing acquisitions. The positive relationship between the CPS and abnormal return is more pronounced in acquisitions of private targets, domestic targets and bidders with high-quality CEOs. These acquisitions make a significant contribution to the long-run performance of the firm, which provides support for the effort inducement hypothesis.
Practical implications
The study's empirical evidence implies that the strong governance environment in Australia and a highly monitored acquisition market and compensation contracts motivates executives to exert their efforts to make value-enhancing acquisitions.
Originality/value
This paper appears to be the first investigation that makes a link between CPS in different components (i.e. short-term, long-term and total pay) as proxy for tournament incentives and the outcomes of both public and non-public acquisitions in the Australian setting.
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The purpose of this paper is to examine the relationship between CEO pay slice (CPS) – the fraction of the top five executive directors’ total compensation that is captured by the…
Abstract
Purpose
The purpose of this paper is to examine the relationship between CEO pay slice (CPS) – the fraction of the top five executive directors’ total compensation that is captured by the chief executive officer (CEO) – and the value of firms in the UK. Specifically, this paper examines whether CPS alters the effectiveness of board performance by influencing cooperation and cohesiveness among its members.
Design/methodology/approach
This paper analyses a large sample of non-financial companies listed on the London Stock Exchange from 1997 to 2010. The empirical methodology includes the analysis of panel data by using a dynamic generalized method of moments estimator.
Findings
The evidence supports social comparison theory and demonstrates that high CPS is likely to impact negatively on executive team’s spirit and motivation. However, the tournament argument is supported when a subsample of companies with CEOs close to retirement age has been analysed. In addition, the findings suggest that companies perform better after the introduction of non-binding say on pay law in the UK in 2002.
Practical implications
The results have major implications for the on-going debate on how to reform executive remuneration, and highlight the importance of considering remuneration issues at the board level, supporting the principles of UK Corporate Governance Code (Financial Reporting Council, 2010).
Originality/value
The results indicate that CPS can provide a useful tool for research on firm performance, and that its relation with the value of firms is an important issue to be considered in the UK context. The findings also highlight the importance of considering board-wide remuneration issues without narrowing them down simply to the details of CEO compensation.
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Cong Feng, Jiong Sun, Yiwei Fang and Iftekhar Hasan
This paper aims to examine the presence of an executive with customer experience (ECE) in a supplier firm’s top management team (TMT). The role of ECE presence remains…
Abstract
Purpose
This paper aims to examine the presence of an executive with customer experience (ECE) in a supplier firm’s top management team (TMT). The role of ECE presence remains understudied in the marketing literature. This study attempts to examine the relationship between ECE presence and firm performance.
Design/methodology/approach
This paper draws on the resource-based view of the firm and adopts a panel firm fixed effects estimator to test the proposed hypotheses. The empirical analysis uses a sample of 1,974 firm-year observations with 489 unique supplier firms. Selection-induced endogeneity is mitigated through the Heckman procedure.
Findings
ECE presence improves firm performance. Additionally, firms benefit less from ECE presence if a board member with customer experience (BCE) is also present, if a chief executive officer commands a higher pay slice (compared to other executives), and if a TMT is more functionally diversified. However, ECE presence is particularly beneficial if the overall economy is in contraction. Comparing the functional positions held by ECEs reveals that ECE in the marketing function (as a chief marketing officer) offers the largest benefit to an average supplier firm. ECE presence is also associated with other firm outcomes (e.g. bankruptcy odds, innovation and customer orientation).
Research limitations/implications
This study makes four contributions to the literature. First, this research contributes to existing studies that investigate marketing expertise in the upper corporate pyramid. Second, the study contributes to the burgeoning body of work across business disciplines that attempt to understand the impact of CxOs on firm performance. Third, the study contributes to the vast literature on customer orientation indirectly. Finally, this paper contributes to the broader literature studying the influence of board and TMT characteristics.
Practical implications
The findings are of particular importance to business-to-business firms. This paper shows that suppliers can benefit significantly from managers with customer experience. Four contingency factors moderate the relationship between ECE presence and firm performance. Among the various functional positions held by an ECE, the findings suggest that hiring an ECE for the marketing functional area is the most beneficial. ECE stands out as a better option for a company than BCE to improve firm performance. ECE presence is also associated with bankruptcy odds, innovation and customer orientation.
Originality/value
This paper provides the first empirical evidence regarding how ECE affects firm performance and also extends prior research on the value of human capital in TMT.
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Hsin-I Chou, Xiaofei Pan and Jing Zhao
This paper aims to examine the relationship between executive pay disparity and the cost of debt.
Abstract
Purpose
This paper aims to examine the relationship between executive pay disparity and the cost of debt.
Design/methodology/approach
The authors use a sample of syndicated bank loans granted to United States (US) listed firms from 1992 to 2014 and adopt the loan yield spread (Chief Executive Officer (CEO) pay slice) as the main proxy for the cost of debt (executive pay disparity). The authors also use the Heckman two-stage model to address the sample selection bias and the two-stage least squares and propensity score matching methods to control the potential endogeneity issues. To test different views about executive pay disparity, the authors adopt the cash-to-stock ratio to proxy for managerial risk-shifting incentives.
Findings
The authors find that the cost of debt is significantly higher for firms with larger executive pay disparity, which is robust to sample selection bias, endogeneity concerns, alternative measures and various controls. This positive relationship increases with the risk-shifting incentives of CEOs instead of other top executives, which supports the managerial power view, and is stronger for firms with higher levels of financial distress. The findings suggest that creditors view executive pay disparity are associated with higher credit risk and CEO entrenchment.
Originality/value
This paper reveals one “dark” side of executive pay disparity: it increases the cost of debt and identifies a significant role played by CEOs' risk-shifting incentives. The authors provide direct evidence of the relevance of pay differential to corporate credit analysis.
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Aisha Khursheed and Nadeem Ahmed Sheikh
The purpose of this paper is to investigate the impact of firm-specific (i.e. firm size, profitability, leverage, dividend, growth opportunities, management quality and firm age…
Abstract
Purpose
The purpose of this paper is to investigate the impact of firm-specific (i.e. firm size, profitability, leverage, dividend, growth opportunities, management quality and firm age) and country-specific (i.e., gross domestic product [GDP] growth) variables on compensation/remuneration offered to chief executive officers (CEOs) working in different industries of Pakistan.
Design/methodology/approach
Panel data techniques, namely, pooled ordinary least squares, fixed effects and random effects methods are used to estimate the results. Moreover, Hausman test is used to choose which estimation method, either fixed effects or random effects, is better to explain the results.
Findings
Firm size, profitability, leverage, growth opportunities and age are some important firm-specific factors that have mixed (i.e. positive/negative) impact on CEO compensation in different industries. Variations in results are due to industry dynamics. However, it is important to mention that three key variables, namely, dividend, management quality and GDP growth have shown consistent positive impact on CEO compensation in most of the industries. In sum, results show that firm-specific and country-specific variables have material effects on CEO compensation. Moreover, results are found consistent with the predictions of agency theory and human capital theory.
Practical implications
The authors are sure that findings of this study provide some support to the board of directors to determine the pay slice for CEOs. Moreover, findings provide support to the regulatory authorities in formulating mechanisms to determine the compensation package for CEOs working in different industries and to improve the Code of Corporate Governance.
Originality/value
To the best of the authors’ knowledge, no empirical study in Pakistan has yet estimated the effects of firm-specific and country-specific variables on compensation offered to CEOs working in different industries. Thus, industry-wise analysis provides some new insights to the decision-makers and lays some foundation upon which a more detail analysis could be based.
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Based on stakeholder and upper echelons theory, this study aims to analyze whether the link between environmental, social and governance (ESG) performance and financial…
Abstract
Purpose
Based on stakeholder and upper echelons theory, this study aims to analyze whether the link between environmental, social and governance (ESG) performance and financial performance is moderated by chief executive officer (CEO) power.
Design/methodology/approach
Listed corporations with reference to the German two-tier system (HDAX and SDAX) for the business years 2010-2018 (775 firm-year observations) have been included. Fixed effects panel regression analysis was conducted to analyze the link between ESG performance (in total and its three pillars) and financial performance (ROA), with special reference to the interaction of a CEO power index.
Findings
While ESG performance has a positive impact on financial performance, the link is more pronounced by CEO power. Thus, in line with prior research on the one-tier system, CEO incentives can positively contribute to the CSR-business case in the German two-tier system. The results remain constant after conducting several robustness checks.
Originality/value
A key contribution to the empirical CSR literature can be stated, as the moderating role of CEO power in the ESG–financial performance link is rather neglected in prior studies. Thus, corporate governance and sustainability should be classified as interactive aspects for the business case of a successful stakeholder management.
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Nicolette Chatelier Prugsamatz
The purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether such CEOs…
Abstract
Purpose
The purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether such CEOs can be incentivized to pursue risky ventures such as innovation projects in line with shareholder's interests that are geared toward the long-term growth of the firm.
Design/methodology/approach
The paper utilizes panel data of US publicly listed companies (2007–2016) to address the influence of CEO dominance on firm innovation effort and the moderating effects of incentives in this relationship through ordinary least squares (OLS) estimations. A two-stage least squares (2SLS) technique is also employed to address possible endogeneity. As a robustness check, further analysis is conducted utilizing an alternative proxy for CEO incentive as well as Tobit analysis (with panel-level random effects).
Findings
Results from both OLS and Tobit estimations offer two key findings. First, there is a significantly negative relationship between CEO pay slice and firm research and development (R&D) intensity. Second, the interaction effect of CEO incentives and CEO dominance is significant and positive.
Research limitations/implications
When provided with the right incentives, such as those that reward long-term performance, dominant CEOs can be incentivized to go after risky ventures like innovation projects that are crucial to promoting the long-term growth of the firm.
Originality/value
This paper utilizes R&D instead of patent outputs as proxies for innovation where the former enables studying R&D efforts for more recent periods compared to prior studies that utilize patent data.
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Frank Li, Tao Li and Dylan Minor
The purpose of this paper is to explore whether firms with powerful chief executive officers (CEOs) tend to invest (more) in corporate social responsibility (CSR) activities as…
Abstract
Purpose
The purpose of this paper is to explore whether firms with powerful chief executive officers (CEOs) tend to invest (more) in corporate social responsibility (CSR) activities as the over-investment hypothesis based on classical agency theory predicts.
Design/methodology/approach
This paper tests an alternative hypothesis that if CSR investment is indeed an agency cost like the over-investment hypothesis suggests, then those activities may destroy firm value.
Findings
Using CEO pay slice (Bebchuk et al., 2011), CEO tenure, and CEO duality to measure CEO power, the authors show that CEO power is negatively correlated with firm’s choice to engage in CSR and with the level of CSR activities in the firm. Furthermore, the results suggest that CSR activities are in fact value enhancing in that as firms engage in more CSR activities their value increases.
Originality/value
The first paper to study CEO power and CSR and their impact on firm value.
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