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http://ssrn.com/abstract=1361327
 
 

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Managerial Power, Stock-Based Compensation, and Firm Performance: Theory and Evidence


Chongwoo Choe


Monash University - Department of Economics

Gloria Yuan Tian


University of Lethbridge Calgary Campus; Financial Research Network (FIRN)

Xiangkang Yin


La Trobe University - La Trobe Business School; Financial Research Network (FIRN)

February 1, 2009


Abstract:     
This paper has two main objectives. First, we provide a simple, theoretical analysis of how managerial power affects CEO compensation and firm performance. Our theoretical model follows the rent extraction view of CEO compensation put forward by the managerial power theory. To focus on the main thesis of the managerial power theory, we restrict our attention to one aspect of power, namely the CEO's power to influence his own pay.

Second, we provide empirical analyses of our theoretical findings in a unified framework using a comprehensive data set encompassing CEO power, CEO pay, and firm performance. Our theoretical predictions on the relation between CEO power and CEO pay, and the relation between CEO power and pay-performance sensitivity of CEO's stock-base compensation are largely supported by our empirical findings for diverse measures of CEO power. However the predicted relation between CEO power and firm performance has mixed support: for some measures of CEO power and firm performance, more CEO power is shown to be detrimental to outside shareholders; for other measures, more CEO power is shown to improve return to outside shareholders. This suggests that, while the managerial power theory has clear relevance in explaining the relation between power and pay, the scope of power needs to be broadened to have better understanding of how CEO power affects firm performance.

Number of Pages in PDF File: 57

Keywords: Managerial power, agency theory, stock-based compensation, performance

JEL Classification: D82, G32, J33

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Date posted: March 30, 2009  

Suggested Citation

Choe, Chongwoo and Tian, Gloria Yuan and Yin, Xiangkang, Managerial Power, Stock-Based Compensation, and Firm Performance: Theory and Evidence (February 1, 2009). Available at SSRN: http://ssrn.com/abstract=1361327 or http://dx.doi.org/10.2139/ssrn.1361327

Contact Information

Chongwoo Choe (Contact Author)
Monash University - Department of Economics ( email )
Department of Economics
PO Box 197
Caulfield East, Victoria 3145
Australia
+61 2 9903 1125 (Phone)
+61 2 9903 1128 (Fax)

Monash University Business and Economics Logo

Gloria Yuan Tian
University of Lethbridge Calgary Campus ( email )
6th floor, 345 - 6 Ave SE
Calgary, Alberta T2G 4V1
Canada
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

Xiangkang Yin
La Trobe University - La Trobe Business School ( email )
Melbourne, Victoria 3083
Australia
61-3-9479 1654 (Fax)
Financial Research Network (FIRN)
C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia
HOME PAGE: http://www.firn.org.au

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References:  66
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