Does social capital mitigate agency problems? Evidence from Chief Executive Officer (CEO) compensation

Abstract

We find that social capital, as captured by secular norms and social networks surrounding corporate headquarters, is negatively associated with levels of CEO compensation. This relation holds in a range of robustness tests including those that address omitted variable bias and reverse causality. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards. Social capital also lessens the accretive effect of CEO power on CEO compensation. These findings indicate that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation.JEL classification: D23, J33, J44, M12, Z13

Trust and Shareholder Voting

“…More generally, our study extends the sparse literature on the impact of culture on corporate governance (e.g., Licht, Goldschmidt, and Schwartz, 2005). In this context, Hilary and Huang (2015) and Hoi, Wu, and Zhang (2018) provide evidence for the U.S. that the level of trust and other social capital that prevails in the county where a firm is headquartered mitigates agency problems such as CEO rent extraction and over-investment. Furthermore, Urban (2018) finds that in more hierarchical countries, i.e., those where greater power distance (Hofstede, 2001) prevails, the CEO turnover-performance sensitivity is lower.…”

“…In general, trust as well as other manifestations of social capital discourage opportunistic, norm-deviant behavior (Gusio, Sapienza, and Zingales, 2011), which includes moral hazard in firms (Hoi, Wu, and Zhang, 2018;Hilary and Huang, 2015). In this regard, the literature suggests that trust in others is not normally exploited because norm-deviant, cheating behavior entails psychological and social costs, such as guilt and shame, costs of a lack of reciprocation or ostracism and more direct punishment by others (e.g., Knack and Keefer, 1997;Fehr and Gaechter, 2000;Francois and Zabojnik, 2005).…”

Political corruption shielding and corporate acquisitions

“…A diagnostic test using the Student's t ‐test finds that the two samples only differ significantly in terms of CAR[−1, 1], which is significantly lower by 0.016 for those that relocate (see Panel B of Table A.7 in Appendix in the Supporting Information). We then run two DiD types of estimations similar to Hoi, Wu, and Zhang (2019) in which we replace Corruption in Equation (1) and add Relocate, the interaction term Relocate × Corruption increase (or Relocate × Corruption decrease), and Corruption increase (Corruption decrease). The Relocate dummy variable equals 1 if the acquirer relocated, and 0 otherwise.…”

Employee quality and audit fee: evidence from China

“…This index can be taken to reflect the culture of integrity and trust across China. Previous studies in the finance literature have argued that corporate culture is reflected in the culture of the community where firms are located (Hilary and Hui, 2009;Jha and Chen, 2015;Linnenluecke et al, 2017;Hoi et al, 2019). This is because employees usually live close to their work locations and the shared local culture is translated into the firms through these employees (Jha and Chen, 2015).…”