Market Reaction to Limiting Executive Compensation: Evidence from TARP Firms

43 Pages Posted: 16 Feb 2010 Last revised: 1 Apr 2010

Date Written: March 29, 2010

Abstract

Using 256 TARP recipients, I find that markets negatively react to the news on limiting executive compensations. Although investors react quite positively for the initial announcement of TARP on October 14, 2008, other announcements regarding compensation regulation including a strict $500,000 salary cap are perceived as bad news in the market. The results are more supportive of the managerial talent hypothesis, which implies that investors are concerned about losing talented executives due to the upper limit of the salary. Splitting the sample by various possible determinants for CARs, I also find that firm size as well as financial performance is an important factor in determining the level of abnormal returns. In conclusion, shareholders of larger and better performing firms are concerned about the potential loss of talent arising from a salary cap.

Keywords: Troubled Asset Relief Program, Executive Compensation, Salary Cap

JEL Classification: G01, G28, G34

Suggested Citation

Kim, Won Yong, Market Reaction to Limiting Executive Compensation: Evidence from TARP Firms (March 29, 2010). Available at SSRN: https://ssrn.com/abstract=1553394 or http://dx.doi.org/10.2139/ssrn.1553394

Won Yong Kim (Contact Author)

Augsburg College ( email )

United States

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