The Road to Riches: CEO Incentives and Firm Performance

46 Pages Posted: 20 Mar 2008 Last revised: 6 Apr 2008

See all articles by Gavin Smith

Gavin Smith

University of New South Wales - School of Banking and Finance

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: February 18, 2008

Abstract

CEO flow incentives, both stock options and bonuses, are positively related to measures of firm market valuation and operating performance suggesting incentives are an important mechanism to align CEO interests with shareholders. These findings are robust to alternative measures of firm valuation and operating performance. They are also persistent across various estimation techniques such as pooled OLS with clustered standard errors, firm random effects, and firm fixed effects and also after accounting for potential endogeneity between compensation and firm performance as well as firm heterogeneity. Providing CEOs with increased equity and bonus incentives is the "road to riches" for owners of a firm.

Keywords: Incentives, CEO compensation, Market valuation, Operating performance

JEL Classification: G23, G32, J33

Suggested Citation

Smith, Gavin and Swan, Peter Lawrence, The Road to Riches: CEO Incentives and Firm Performance (February 18, 2008). Available at SSRN: https://ssrn.com/abstract=1089968 or http://dx.doi.org/10.2139/ssrn.1089968

Gavin Smith

University of New South Wales - School of Banking and Finance ( email )

Sydney, NSW 2052
Australia

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

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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