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Does CEO pay slice reflect poor corporate governance?
Author(s) -
Lel Ugur,
Tepe Mete
Publication year - 2021
Publication title -
journal of corporate accounting and finance
Language(s) - English
Resource type - Journals
eISSN - 1097-0053
pISSN - 1044-8136
DOI - 10.1002/jcaf.22487
Subject(s) - corporate governance , endogeneity , listing (finance) , business , executive compensation , accounting , agency cost , enterprise value , shareholder , value (mathematics) , monetary economics , shareholder value , restructuring , agency (philosophy) , order (exchange) , economics , finance , econometrics , machine learning , computer science , philosophy , epistemology
We examine whether high CEO pay inequality, measured by the share of total managerial pay captured by the CEO (CEO pay slice or CPS), is an outcome of poor corporate governance, and its implications for shareholder wealth. We exploit the 2002 NYSE and NASDAQ governance reforms that mandated firms to have majority independent boards as a quasi‐exogenous source of variation in the internal governance environment of firms. Results show that CPS decreases following the passage of these exchange listing regulations, for firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for firms that likely suffer from agency conflicts in the pre‐regulation period. The novelty of our paper stems from combining the difference‐in‐difference estimation with CPS as a measure of CEO compensation, reducing the endogeneity concerns. Our paper links board independence, CPS, CEO entrenchment, and firm value by documenting that the impact of governance reforms on CPS is conditional on CEO entrenchment. Overall, our results suggest that poor corporate governance environments are associated with high CPS and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment.