Idiosyncratic volatility, executive compensation and corporate governance: examination of the direct and moderate effects

Abstract

Entrenchment of private benefits by the CEO or dominant owners can lead corporations to avoid riskier but more private benefits resulting in greater idiosyncratic volatility and information flow trading. Using a unique database of 806 listed firms, we investigate the impact of CEO compensation and corporate governance on idiosyncratic volatility and information flow trading. We find strong and robust evidence that equity-based (fixed income) CEO compensation is negatively (positively) related to volatility and information trading. Incorporating an agent principal-principal perspective into our models of managerial discretion provides us with an accurate prediction of how the proportion of CEO compensation and the degree of entrenchment will influence risk-taking decisions as well as how equitybased compensation interacts with related-party transaction and ownership dispersion to influence stock volatility. Finally, we find that idiosyncratic volatility and information flow trading are also affected by CEO compensation and corporate governance, which act as instrumental variables, while subject to environmental variants and the jointly determined.

The Influence of CEO Compensation on Disclosure of Related Party Transactions with Corporate Governance as a Moderate Variable

“…The results of this study are in line with the previous studies [4]- [6], [8], [10], [11], which gave the same conclusion, i.e., that the compensation of the president director had a positive influence on related party transaction disclosure. Rahmat et al (2019) also explicated that the compensation package received by the president director reduced the related party transaction conflicts they did but increased the related party transaction disclosure.…”

“…Empirical studies of related party transaction disclosures have increased in several countries, such as Brazil, China, Malaysia, and Taiwan, after the financial scandal in the U.S., as explained by previous studies [4]- [11]. Alves and Leal (2016), Balsam (2017), Hu and Guang (2010), Rahmat et al (2019), Shang et al (2020), Wang (2014) explained that the president director's compensation had a positive effect on the disclosure of related party transaction. Balsam (2017), Hu and Guang (2010), Songhua et al (2009Songhua et al ( , 2015 also asserted that CEO duality had a positive effect on the disclosure of related party transactions.…”

“…The president director's compensation is shown from the total of the president director's basic salary and bonuses received by the president director, including stock options [20]. Alves and Leal (2016), Balsam (2017), Hu and Guang (2010), Shang et al (2020), Wang (2014) showed that the compensation of the president director (CEO) was positively related to related party transactions. Besides, Balsam (2017) compared the relationship before and after issuing the Securities and Exchange Commission (SEC) regulations related to regulation No.…”

Corporate governance and remuneration: a bibliometric analysis

“…• The performance sensitivity of CEO pay, and turnover differ significantly between group affiliates and stand-alone firms Fedaseyeu et al (2018) • On average, more qualified directors handle more board functions and receive higher pay, but this is not true for co-opted directors (i.e. those that joined the board after the CEO) • Co-opted directors are assigned more functions and receive higher pay on boards highly influenced by the CEO Kang and Zaheer (2018) • The preference of manager is leaded by the managerial incentives Dah and Frye (2017) • On average, CEOs are under-remunerated • Excessive remuneration is consistent with increased director workloads Sila et al (2017) • When more-independent directors get higher rank in, the firm-specific information content of a firm's stock price increases Wang (2016) • CEO remuneration is negatively (positively) related to information trading (volatility) generational successions, assessment of the efficiency of the different investors as governance systems, the role of the company's affiliation to business groups under different institutional contexts, and its subsequent impact on corporate governance factors such as firm value, performance and financial decisions. Corporate governance and executive remuneration are undoubtedly matter of social and economic interest.…”

The role of a banking market concentration in the effect of monetary policy on bank risk: evidence from Thailand

“…The larger profitability of banks could possibly be characterized by facing less information asymmetry (Mankiw, 1986) and less riskiness of operations as can be indicated by NPL and LLP ratio. Besides, the current literature (e.g., Mishra & Modi, 2013;Wang, 2016) finds that higher profitability decreases bank-specific risks as it allows bank to posses a comparative advantage in resilience to shocks. Meanwhile, Bessler et al (2015) discovers that banks with higher levels of loan loss provision imply more exposure to idiosyncratic risk.…”