Group Identity and Agency Frictions : Evidence using Big Data

Abstract

This paper examines whether similarity in social identities between a manager and the board affects executive compensation, firm value, and agency frictions. By using a novel dataset on surnames with multiple identities (native language, native place, and caste), developed by merging micro census data of 474 million Indians with Linguistic Survey of India (LSI) data, I provide evidence that the firms with a shared group identity between a manager and the board do well compare to other firms and due to in-group favoritism, managers of such firms earn higher compensation. These results are stronger for group identity based on native language and native place. I also find that the firm benefits from taking on the cost of in-group favoritism as it reduces the agency frictions and increases firm value in the long run. These results are robust to the endogeneity test, managerial influence on firm, college ties, ties from past employment, and various other checks.

Keywords: Group Identity, In-Group Favoritism, Managerial Compensation, Firm Value

JEL Classification: C92, M12, D21, D22