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Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?
Author(s) -
Kim Hyungseok,
Kim Woochan
Publication year - 2020
Publication title -
journal of business finance and accounting
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.282
H-Index - 77
eISSN - 1468-5957
pISSN - 0306-686X
DOI - 10.1111/jbfa.12453
Subject(s) - executive compensation , family member , business , compensation (psychology) , stock (firearms) , sample (material) , cash flow , stock options , cash , control (management) , corporate governance , accounting , economics , finance , management , psychology , social psychology , medicine , mechanical engineering , chemistry , family medicine , chromatography , engineering
This study examines how executive compensation is set when a firm is a business group member. Using Korea's unique setting of family‐controlled business groups, we find that a member firm's executive cash compensation is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link is consistent with the hypothesis that corporate managers are rewarded for their decision to benefit the controlling family at the expense of the firm they manage. Specifically, we find that the sensitivity of executive pay to other member firms’ performance exists only in respect to firms in which the cash flow rights of the controlling family exceed those of the subject firm. We also find that this sensitivity is strengthened if the controlling family's control–ownership disparity in the subject firm is above the sample median.