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HEADS I WIN, TAILS YOU LOSE: INSTITUTIONAL MONITORING OF EXECUTIVE PAY RIGIDITY
Author(s) -
Choi Paul Moon Sub,
Chung Chune Young,
Hwang Ji Hoon,
Liu Chang
Publication year - 2019
Publication title -
journal of financial research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.319
H-Index - 49
eISSN - 1475-6803
pISSN - 0270-2592
DOI - 10.1111/jfir.12196
Subject(s) - rigidity (electromagnetism) , incentive , executive compensation , shareholder , business , principal–agent problem , enterprise value , accounting , institutional investor , agency (philosophy) , finance , microeconomics , monetary economics , economics , corporate governance , structural engineering , engineering , philosophy , epistemology
Agency theory argues that pay for performance alleviates the conflict of interest between managers and shareholders. Furthermore, the literature finds that institutional monitoring tends to promote the performance–pay linkage, thus aligning the two parties’ incentives. We find that executive compensation rigidity is negatively and significantly associated with firm value. Moreover, ownership by long‐term institutional investors reduces the pay rigidity of top managers in underperforming firms, thus decreasing the value‐destroying effect of the rigidity. Overall, these results reaffirm the role of institutional monitoring in mitigating managerial rent extraction.