Do High CEO Pay Ratios Destroy Firm Value?

51 Pages Posted: 31 Oct 2016 Last revised: 6 Jul 2017

See all articles by Qiang Cheng

Qiang Cheng

Singapore Management University

Tharindra Ranasinghe

American University

Sha Zhao

Oakland University - Department of Accounting and Finance

Date Written: July 5, 2017

Abstract

There is growing public concern over the rapid growth in CEO pay relative to average worker pay (CEO pay ratio). Critics contend that high CEO pay ratios could destroy firm value by damaging employee morale and/or signal CEO rent extraction. In this paper, we use a proprietary dataset to examine the relationship between CEO pay ratio and firm value/performance. Contrary to critics’ arguments, we find that industry-adjusted CEO pay ratios are positively associated with both firm value and performance. We also find that high CEO pay ratios are associated with higher quality acquisitions and stronger CEO turnover-performance sensitivity. Our results challenge the notion that high CEO pay ratios are on average economically harmful to the firm.

Keywords: pay ratio, corporate governance, firm value, acquisitions, CEO turnover-performance sensitivity

JEL Classification: G30, G34, M40, M41

Suggested Citation

Cheng, Qiang and Ranasinghe, Tharindra and Zhao, Sha, Do High CEO Pay Ratios Destroy Firm Value? (July 5, 2017). Robert H. Smith School Research Paper No. RHS 2861680, Singapore Management University School of Accountancy Research Paper No. 2017-58, Available at SSRN: https://ssrn.com/abstract=2861680 or http://dx.doi.org/10.2139/ssrn.2861680

Qiang Cheng (Contact Author)

Singapore Management University ( email )

60 Stamford Road
Singapore, 178900
Singapore

Tharindra Ranasinghe

American University ( email )

United States

Sha Zhao

Oakland University - Department of Accounting and Finance ( email )

339 Elliott Hall
275 Varner Drive
Rochester, MI Michigan 48309-4401
United States

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