How Much Do CEO Incentives Matter?
UNSW Australia Business School, School of Banking and Finance; Financial Research Network (FIRN)
July 11, 2010
23rd Australasian Finance and Banking Conference 2010 Paper
The impact of CEO incentive compensation on firm performance is difficult to quantify because performance also affects incentives. To circumvent this problem, I form an estimate of the changes in CEO incentives caused by exogenous stock price movements using a return index for each firm’s peer group and lagged CEO holdings. For the mean incentive level, Tobin’s q increases by 10.0% compared to that of counterfactual firms that lack CEO incentive compensation. I also introduce an ex ante measure of the CEO’s discretion over her incentive portfolio and show that the greater this discretion the less incentives mitigate agency conflicts.
Number of Pages in PDF File: 45
JEL Classification: G3, G30
Date posted: November 19, 2010