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

46 Pages Posted: 16 Aug 2010 Last revised: 26 May 2011

James Jianxin Gong

California State University at Fullerton

Date Written: May 14, 2011

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.

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

JEL Classification: G30, L20, J33

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: https://ssrn.com/abstract=1659998

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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