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

Mira Ganor

University of Texas at Austin - School of Law

Date Written: August 25, 2011

Abstract

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

Suggested Citation

Ganor, Mira, Agency Costs in the Era of Economic Crisis – The Enhanced Connection between CEO Compensation and Corporate Cash Holdings (August 25, 2011). Available at SSRN: https://ssrn.com/abstract=1916470 or http://dx.doi.org/10.2139/ssrn.1916470

Mira Ganor (Contact Author)

University of Texas at Austin - School of Law ( email )

727 East Dean Keeton Street
Austin, TX 78705
United States

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