Abstract

http://ssrn.com/abstract=1659998
 
 

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Examining Shareholder Value Creation Over CEO Tenure: A New Approach to Testing Effectiveness of Executive Compensation


James Jianxin Gong


California State University at Fullerton

May 14, 2011

Journal of Management Accounting Research, Forthcoming

Abstract:     
This paper examines the relationship between CEO compensation and shareholder value added over CEO tenure. The research design exploits two fundamental attributes of CEO compensation and shareholder value added: (i) both CEO compensation and shareholder value added aggregate naturally over CEO tenure, and (ii) extending the time interval over which the two variables are measured is likely to result in a better match between CEO compensation and shareholder value created by the CEO. I measure CEO compensation with nominal value of CEO pay, ex post realized pay and ex ante pay-for-performance sensitivity. I find that CEOs receiving higher nominal or realized pay create more shareholder value. Further, higher median pay-for-performance sensitivity during CEO tenure is associated with higher aggregate market value changes and cumulative abnormal stock returns. Finally, CEO pay efficiency (calculated as the ratio of shareholder value added to CEO pay, both aggregated over CEO tenure) is higher if median pay-for-performance sensitivity during CEO tenure is higher.

Number of Pages in PDF File: 46

Keywords: Executive compensation, pay-for-performance sensitivity, corporate governance, value based management

JEL Classification: G30, L20, J33

Accepted Paper Series


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Date posted: August 16, 2010 ; Last revised: May 26, 2011

Suggested Citation

Gong, James Jianxin, Examining Shareholder Value Creation Over CEO Tenure: A New Approach to Testing Effectiveness of Executive Compensation (May 14, 2011). Journal of Management Accounting Research, Forthcoming. Available at SSRN: http://ssrn.com/abstract=1659998

Contact Information

Jianxin Gong (Contact Author)
California State University at Fullerton ( email )
Department of Accounting
Mihaylo College of Business and Economics
Fullerton, CA 92831
United States
(657)278-3897 (Phone)
(657)278-4518 (Fax)
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