Agency Costs in the Era of Economic Crisis – The Enhanced Connection between CEO Compensation and Corporate Cash Holdings
40 Pages Posted: 27 Aug 2011 Last revised: 14 Jul 2012
Date Written: August 25, 2011
This Article reports results of an empirical study that suggests that the current economic crisis has changed managerial behavior in the US in a way that may impede economic recovery. The study finds a strong, statistically significant and economically meaningful, positive correlation between the CEO total annual compensation and corporate cash holdings during the economic crisis in the years 2008-2010. This correlation did not exist in comparable magnitudes in prior years. The empirical findings suggest that high CEO compensation increases managerial risk aversion in times of crisis. The Article considers several explanations for these empirical findings, some of which imply a market failure. The study has implications for the discussion on managerial pay arrangements and the implementation of the Dodd-Frank Act concerning say-on-pay.
Keywords: executive compensation, cash holdings, cash hoarding, pay for performance, say on pay, equity-based compensation, cash compensation, corporate governance
JEL Classification: G28, G31, G32, G34, G35, G38, D23, J31, J33, J44, K22, K23, M14
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