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1 – 10 of over 30000Franziska M. Renz and Julian U. N. Vogel
Aligning interests of principals and agents is the most efficient way to reduce the agency conflict. Yet, the literature on executive compensation reveals inefficiencies in…
Abstract
Purpose
Aligning interests of principals and agents is the most efficient way to reduce the agency conflict. Yet, the literature on executive compensation reveals inefficiencies in providing executives with legal ownership. Thus, the authors go beyond legal ownership and posit that executives' psychological ownership further aligns the interests of executives as agents and shareholders as principals.
Design/methodology/approach
The authors employ sophisticated methodology, including dynamic panel data regressions, static panel data regressions and propensity score matching. External validity is achieved through the large-scale sample of 22,179 firm-quarters spanning 24 quarters from 2013 to 2018 of the S&P 1500.
Findings
Psychological ownership aligns the interests of executives and shareholders since this mindset makes executives perceive the company as “theirs”. Executives' psychological ownership decreases firms' fraud and financial performance. The decrease in financial performance is related to an observed increase in executives' risk-aversion. Investors recognize this ownership mindset in executives and reward it with a positive market reaction.
Originality/value
The study is the first to consider psychological ownership of executives in relation to firm outcomes such as financial performance or fraud. The findings are of interest to scholars and practitioners, as this study establishes both theoretically and empirically a way to align the interests of principals and agents beyond executive compensation.
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Alfonsina Iona, Leone Leonida and Alexia Ventouri
The aim of this paper is to investigate the dynamics between executive ownership and excess cash policy in the UK.
Abstract
Purpose
The aim of this paper is to investigate the dynamics between executive ownership and excess cash policy in the UK.
Design/methodology/approach
The authors identify firms adopting an excess policy using a joint criterion of high cash and cash higher than the target. Logit analysis is used to estimate the impact of executive ownership and other governance characteristics on the probability of adopting an excess cash policy.
Findings
The results suggest that, in the UK, the impact of the executive ownership on the probability of adopting an excess cash policy is non-monotonic, in line with the alignment-entrenchment hypothesis. The results are robust to different definitions of excess cash policy, to alternative specifications of the regression model, to different estimation frameworks and to alternative proxies of ownership concentration.
Research limitations/implications
The authors’ approach provides a new measure of the excess target cash for the firm. They show the need to identify an excess target cash policy not only by using an empirical criterion and a theoretical target level of cash, but also by capturing persistence in deviation from the target cash level. The authors’ measure of excess target cash calls into questions findings from previous studies. The authors’ approach can be used to explore whether excess cash holdings of UK firms and the impact of managerial ownership have changed from before the crisis to after the crisis.
Practical implications
The authors’ measure of excess target cash allows identifying in practice levels of cash which are abnormal with respect to an equilibrium level. UK firms should be cautious in using executive ownership as a corporate governance mechanism, as this may generate suboptimal cash holdings and suboptimal firm value. Excess cash policy might be driven not only by a poor corporate governance system, but also by the interplay between agency costs of managerial opportunism and cost of the external finance which further research could explore.
Originality/value
Actually, “how much cash is too much” is a question that has not been addressed by the literature. The authors address this question. Also, this amount of cash allows the authors to study the extent to which executive ownership contributes to explain the out-of-equilibrium persistency in the cash level.
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Alfonsina Iona and Leone Leonida
The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision.
Abstract
Purpose
The purpose of this paper is to identify firms in the UK adopting a policy of high cash and low leverage and investigate how executive ownership contributes to this decision.
Design/methodology/approach
Firms following this policy are identified both by using a fixed classification approach and the analysis of the distribution of cash and leverage. Logit analysis is then used to estimate the probability of adopting the policy as a function of executive ownership.
Findings
Extreme financial policies are suboptimal as firms adopting these policies tend to undershoot (overshoot) their target leverage (cash holdings) ratios. The impact of the executive ownership on the probability of adopting this policy is U-shaped, in line with the alignment–entrenchment hypothesis.
Practical implications
Despite the substantial presence of non-executive directors in the boards and a significant amount of shareholdings by executive directors, the firms under analysis have adopted suboptimal financial policies possibly because poorly governed or because executive ownership is the range where entrenchment is feasible.
Originality/value
This is the first attempt at recognising policies of high cash and low leverage as being explicitly interdependent. It is also the first study focussing on the UK, a country of interest, because ownership structure is relatively dispersed. Moreover, instead of choosing fixed threshold levels of the variable in defining the extreme financial policy, this paper proposes the analysis of the distribution of cash holdings and leverage and accounts for target levels of cash and leverage.
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This paper seeks to investigate the holding of non‐executive directorships by CEOs in a sample of 387 large UK companies. The main objective of the paper is to ascertain whether…
Abstract
Purpose
This paper seeks to investigate the holding of non‐executive directorships by CEOs in a sample of 387 large UK companies. The main objective of the paper is to ascertain whether the holding of additional directorships by CEOs is influenced by the governance and ownership characteristics of their companies.
Design/methodology/approach
The approach takes the form of an empirical analysis of the holding of non‐executive directorships by 387 CEOs of large UK companies.
Findings
The study finds that 101 CEOs (26 per cent) hold at least one non‐executive directorship but the most any single CEO holds is three with the vast majority holding one other directorship. CEOs who also serve as chairman are more likely to hold non‐executive directorships while CEOs in companies with greater concentration of external ownership are less likely to hold other directorships. The study finds no evidence that either non‐executive representation or managerial ownership (including CEO ownership) influences the holding of additional directorships. The holding of additional directorships is positively related to company size, suggesting that the more complex environment in which CEOs of large companies operate leads to the offer of additional directorships.
Originality/value
The findings are important as they key into an ongoing debate on whether the holding of additional directorships by CEOs is consistent with good governance practice. The evidence presented here provides mixed information for governance regulators. While a significant majority of CEOs do not hold additional directorships, there is evidence that weaker board and external ownership monitoring is associated with a greater likelihood that CEOs will sit on other boards.
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Zhongfeng Su, Yuan Li and Lin Li
The research on corporate governance has different perspectives on the relationship between ownership concentration and executive compensation, and the empirical findings on this…
Abstract
Purpose
The research on corporate governance has different perspectives on the relationship between ownership concentration and executive compensation, and the empirical findings on this linkage are also inconclusive. The purpose of this paper is to investigate the impact of ownership concentration on executive compensation in emerging economies.
Design/methodology/approach
By connecting different perspectives with the characteristics of emerging economies together, this research explores the impact of ownership concentration on executive compensation, and then empirically tests the hypotheses based on the archival data of publicly held firms in China.
Findings
The paper finds that there is no significant relationship between ownership concentration and executive compensation in state‐owned enterprises (SOEs), while there is a U‐shaped relationship in non‐SOEs.
Originality/value
This study not only offers an empirical test of the effect of ownership concentration on executive compensation, but also provides some insights into the debates on the relationship between ownership concentration and executive compensation in emerging economies.
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Ozgur Ozdemir and Erhan Kilincarslan
This study aims to examine the governance role of shareholders and board of directors in determining firm performance through an eclectic multi-theoretic model that integrates…
Abstract
Purpose
This study aims to examine the governance role of shareholders and board of directors in determining firm performance through an eclectic multi-theoretic model that integrates structure and incentive functions of agency theory and capability aspect of the resource-based view.
Design/methodology/approach
The research model uses a large panel data set of 2,364 UK firms over the period 2000–2010 and uses alternative specifications of the model to improve robustness.
Findings
The results show that the industry experience of major shareholders as a proxy for shareholder capability has a significant positive impact on investee firm performance. The findings also reveal that the lock-in effect of the largest shareholder has a positive impact on performance, whereas the monitoring effectiveness of shareholders is not associated with ownership concentration. Moreover, the results indicate the underlying capabilities of the board of directors and their impact on corporate performance – particularly, the interlocking directorates of executives have a positive impact on firm performance but those of non-executives have a negative one. However, the previous directorship experience of non-executives has a positive impact on performance.
Research limitations/implications
This study presents a more comprehensive and complete understanding of the governance-performance relationship beyond the narrow or partial explanations provided by single-theory-based studies or those of investigating the effect of various governance tools separately.
Practical implications
This study provides more insights into the capability dimension of shareholders and the role of incentives in motivating shareholders to exercise stronger oversight on the management rather than just using ownership concentration. Hence, the study can serve as valuable guidance for investors, corporate managers and policymakers.
Originality/value
To the best of the knowledge, this is the first comprehensive study that uses an eclectic philosophical approach, integrating the agency theory and resource-based view, to not only examine the impact of board of directors but also investigate the governance role of shareholders in modern corporations to understand how shareholders acquire the requisite skills and information, the best practices and processes, and ultimately use the scarce and inimitable resources that help investee firms in improving their performance.
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FAYEZ A. ELAYAN, JAMMY S.C. LAU and THOMAS O. MEYER
Incentive‐based executive compensation is regarded as a mechanism for alleviating agency problems between executives and shareholders. Seventy‐three New Zealand (NZ) listed…
Abstract
Incentive‐based executive compensation is regarded as a mechanism for alleviating agency problems between executives and shareholders. Seventy‐three New Zealand (NZ) listed companies are used to examine the relationship between executive incentive compensation schemes (ICS) and firm performance. The results suggest that neither compensation level nor adoption of an ICS are significantly related to returns to shareholders or ROA. However, there is a statistically significant relationship between Tobin's q and both CEO compensation and executive share ownership. Further, the evidence suggests the recent compensation disclosure requirements in NZ are not yet stringent enough to allow adequate analysis of the link between ICSs and corporate performance.
Hao Liang, Luc Renneboog and Sunny Li Sun
We take a state-stewardship view on corporate governance and executive compensation in economies with strong political involvement, where state-appointed managers act as…
Abstract
Purpose
We take a state-stewardship view on corporate governance and executive compensation in economies with strong political involvement, where state-appointed managers act as responsible “stewards” rather than “agents” of the state.
Methodology/approach
We test this view on China and find that Chinese managers are remunerated not for maximizing equity value but for increasing the value of state-owned assets.
Findings
Managerial compensation depends on political connections and prestige, and on the firms’ contribution to political goals. These effects were attenuated since the market-oriented governance reform.
Research limitations/implications
Economic reform without reforming the human resources policies at the executive level enables the autocratic state to exert political power on corporate decision making, so as to ensure that firms’ business activities fulfill the state’s political objectives.
Practical implications
As a powerful social elite, the state-steward managers in China have the same interests as the state (the government), namely extracting rents that should adhere to the nation (which stands for the society at large or the collective private citizens).
Social implications
As China has been a communist country with a single ruling party for decades, the ideas of socialism still have a strong impact on how companies are run. The legitimacy of the elite’s privileged rights over private sectors is central to our question.
Originality/value
Chinese executive compensation stimulates not only the maximization of shareholder value but also the preservation of the state’s interests.
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Outlines previous research on the role of executive compensation contracts in reducing conflicts of interest between ownership and control; and develops hypotheses on the effects…
Abstract
Outlines previous research on the role of executive compensation contracts in reducing conflicts of interest between ownership and control; and develops hypotheses on the effects of chief executive officer stock options and share ownership on subsequent firm performance. Suggests that since options do not create losses when share prices decline, they encourage more risk taking than share ownership. Explains the methodology used to test these ideas on 1994‐1996 data for a sample of large US firms and presents the results, which suggest that both stock options and share ownership are positively linked to later firm performance but that the link is stronger for ownership in high risk situations, but lower performance where risk is high. Considers the implications for corporate governance and consistency with other research; and calls for further research.
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Ben Amoako-Adu, Vishaal Baulkaran and Brian F. Smith
The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess capital…
Abstract
Purpose
The chapter investigates three channels through which private benefits are hypothesized to be extracted in dual class companies: excess executive compensation, excess capital expenditures and excess cash holdings.
Design/methodology/approach
With a propensity score matched sample of S&P 1500 dual class and single class companies with concentrated control, the chapter analyzes the relationship between the valuation discount of dual class companies and measures of excess executive compensation, excess capital expenditure and excess cash holdings.
Findings
Executives in dual class firms earn greater compensation relative to their counterparts in single class firms. This excess compensation is more pronounced when the executive is a family member. The value of dual class shares is discounted most when cash holdings and executive compensation of dual class are excessive. Excess compensation is highest for executives who are family members of dual class companies. The dual class discount is not related to excess capital expenditures.
Originality/value
The research shows that the discount in the value of dual class shares in relation to the value of closely controlled single class company shares is directly related to the channels through which controlling shareholder-managers can extract private benefits.
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