The Interaction Effects of CEO Power, Social Connections and Incentive Compensation on Firm Value

We study the relation between company value and the interplay between CEO power, CEO equity incentives and the friendliness of the board of directors. Following Bebchuk, Cremers and Peyer (2011), we measure CEO power as the proportion paid to the CEO of the total compensation paid to the top five executives of the firm. We find that strong CEO equity incentives and the presence of a friendly board of directors both individually moderate the negative effect of CEO power on Tobin’s q. Moreover, these variables also work together. We find that firm value tends to increase when equity incentives are combined with a friendly board. We conclude that the negative effects of CEO power on firm value are limited to firms with weak CEO equity incentive compensation plans and arms-length boards of directors.

Keywords: CEO power, social connections, corporate governance

JEL Classification: G34

Suggested Citation: Suggested Citation

Caton, Gary and Goh, Jeremy and Ke, Jinghao and Linn, Scott C., The Interaction Effects of CEO Power, Social Connections and Incentive Compensation on Firm Value (January 14, 2015). Available at SSRN: https://ssrn.com/abstract=2594993 or http://dx.doi.org/10.2139/ssrn.2594993