Do executive compensation contracts maximize firm value? Indications from a quasi-natural experiment

Abudy, Menachem; Amiram, Dan; Rozenbaum, Oded; Shust, Efrat

doi:10.1016/j.jbankfin.2020.105787

Cited by 20 publications

(12 citation statements)

References 30 publications

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“…Abraham and Singh (2016) found a robust positive association between executive remuneration and the growth in the rates of return of controlling shareholders. Despite the low information quality that permeates emerging markets, they are not devoid of corporate governance mechanisms, which are considered crucial to reducing agency conflicts in these types of environments (Abudy et al, 2020). Based on the evidence, we propose that companies differ in terms of their executive compensation contracts.…”

Section: Relationship Between Executive Compensation and Firm Performancementioning

confidence: 98%

Tracing the links between executive compensation structure and firm performance: evidence from the Brazilian market

Dias

Vieira

Figlioli

2020

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Purpose This study aims to investigate how different executive compensation structures were related to the performance of firms. Design/methodology/approach This study was based on a sample of companies with the highest standards of corporate governance listed on the Brazilian Stock Exchange. We adopted the multiple correspondence analysis followed by the hierarchical cluster analysis to propose a typology defined by fixed and variable components of the executive compensation and multiple firm performance indicators. Findings The analysis produced three clusters, which were submitted to robustness tests, highlighting that companies used the compensatory incentives in striking distinct ways as governance mechanisms. The study found a positive relationship between the performance of companies and the variable incentives of executive compensation, especially the long-term incentive, as well as a negative relationship between the performance of firms and the fixed component of the compensation structure. Research limitations/implications This research, whose sample was based on an emerging market, adds empirical evidence to the literature. However, future studies are invited to address the relationships between executive compensation structures and firm performance in other markets, as well as to examine these relationships in companies with distinct levels of governance. Practical implications This study provides insights on how the incentive structure can be adopted as an efficient governance mechanism, especially for companies in emerging markets. Originality/value The main novelty of this paper is that the methodological strategy used here enabled the authors to discriminate distinct executive compensation structures and establish a relationship between these compensation structures and different types of performance indicators.

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Section: Relationship Between Executive Compensation and Firm Performancementioning

confidence: 98%

Tracing the links between executive compensation structure and firm performance: evidence from the Brazilian market

Dias

Vieira

Figlioli

2020

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“…, 2009). Here, long-term incentive-based compensation ensures that executives' goals are in harmony with shareholder aims, which include both financial and ESG dimensions (Abudy et al. , 2020; Borghesi et al.…”

Section: Theoretical Background and Hypotheses Developmentmentioning

confidence: 99%

From profits to purpose: ESG practices, CEO compensation and institutional ownership

Nasta,

Magnanelli,

Ciaburri

2024

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PurposeBased on stakeholder, agency and institutional theory, this study aims to examine the role of institutional ownership in the relationship between environmental, social and governance practices and CEO compensation.Design/methodology/approachUtilizing a fixed-effect panel regression analysis, this research utilized a panel data approach, analyzing data spanning from 2014 to 2021, focusing on US companies listed on the S&P500 stock market index. The dataset encompassed 219 companies, leading to a total of 1,533 observations.FindingsThe analysis identified that environmental scores significantly impact CEO equity-linked compensation, unlike social and governance scores. Additionally, it was found that institutional ownership acts as a moderating factor in the relationship between the environmental score and CEO equity-linked compensation, as well as the association between the social score and CEO equity-linked compensation. Interestingly, the direction of these moderating effects varied between the two relationships, suggesting a nuanced role of institutional ownership.Originality/valueThis research makes a unique contribution to the field of corporate governance by exploring the relatively understudied area of institutional ownership's influence on the ESG practices–CEO compensation nexus.

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“…Executive incentive is one of the most effective mechanisms to mitigate the agency problem (Graham et al, 2012 ; Chen et al, 2018 ; Page, 2018 ; Gilje et al, 2020 ). In the modern corporate governance mechanism, the most common goals of executive compensation incentives are as follows: (1) to ensure the interests of capital suppliers and maximize the wealth of shareholders (Shleifer and Vishny, 1997 ), and (2) to maximize the overall value of the company under the condition of achieving the first goal (Page, 2018 ; Abudy et al, 2020 ). In view of these goals, firms tend to incentivize and constrain top executives using executive incentive contracts.…”

Section: Research Hypothesismentioning

confidence: 99%

“…Research on executive incentives and capital cost has mainly explored the effects of corporate performance on executive incentive systems (Chen et al, 2018 ; Fang et al, 2018 ; Abudy et al, 2020 ; Chowdhury et al, 2020 ; Carter et al, 2021 ; Gao et al, 2021 ; Ren et al, 2021 ). For example, Chen et al ( 2018 ) investigated the effect of corporate financial distress risk on the initial compensation contracts of new executives.…”

Section: Introductionmentioning

confidence: 99%

Research on the Effect of Executive Incentive Institutional Innovation on the Cost of Equity—Evidence From Chinese Listed Companies

Wang

Deng

2021

Front. Psychol.

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Executive incentive has long been a hot topic among academics and practitioners. With the continuous development of China's manager market, the spirit of innovation and entrepreneurship among executives has exerted a greater influence on corporate performance. Enterprise innovation is an important part of the entrepreneurial spirit. Moreover, China's supply-side reforms and compensation system of the state-owned enterprises (SOEs) have been advanced and innovative. Therefore, based on the manager human capital theory and the organizational innovation theory, and using 15,492 firm-year observations from China's Shanghai and Shenzhen A-share listed companies for the period 2005–2018, we constructed various models, including the Gorden model, the Growth Rate of Price–Earnings Ratio model (PEG), the Ohlson and Juettner-Nauroth model (OJ), and the Capital Asset Pricing model (CAPM), to measure the cost of equity. We investigated the effect of the institutional innovation of executive incentives on the cost of equity, and the heterogeneous influence of China's special property rights system on the relationship between the two. We found that the innovations of the executive incentive system have a positive governance effect on the cost of equity. In particular, executive compensation incentives significantly reduce a company's equity costs. We also find that the state-owned property rights may weaken the positive effect of institutional innovation of executive incentives. Furthermore, China's executive incentives system and corporate governance mechanism are imperfect; and therefore, institutional innovation is a matter of great urgency and more innovative ideas for the manager market need to be introduced. China's listed companies should give full play to the spirit of innovation and entrepreneurship, constantly innovating incentive-based compensation systems of companies, and establishing a scientific and innovative concept of the cost of equity. The findings are robust after controlling for potential endogeneity concerns.

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Do executive compensation contracts maximize firm value? Indications from a quasi-natural experiment

Cited by 20 publications

References 30 publications

Tracing the links between executive compensation structure and firm performance: evidence from the Brazilian market

Tracing the links between executive compensation structure and firm performance: evidence from the Brazilian market

From profits to purpose: ESG practices, CEO compensation and institutional ownership

Research on the Effect of Executive Incentive Institutional Innovation on the Cost of Equity—Evidence From Chinese Listed Companies

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