CEO Compensation, Shareholder Rights, and Corporate Governance: An Empirical Investigation

Abstract

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Agency theory suggests that CEOs may exploit shareholders when shareholder rights are weak, placing their own private benefits ahead of those of the stockholders. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. Higher CEO pay is associated with a higher degree of potential managerial entrenchment. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation if shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation if shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.

Keywords: Compenation, Shareholder Rights, Corporate Governance

JEL Classification: G30, G34, J33