Do Executive Compensation Contracts Maximize Firm Value? Indications from a Quasi-Natural Experiment

52 Pages Posted: 3 Oct 2017 Last revised: 8 Aug 2019

See all articles by Menachem (Meni) Abudy

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Dan Amiram

Tel Aviv University - Coller School of Management

Oded Rozenbaum

George Washington University - School of Business

Efrat Shust

The Department of Management and Economics, The Open University of Israel

Date Written: August 6, 2019

Abstract

We find significant positive abnormal returns surrounding a surprising and quick enactment of a law that restricts executive pay to a binding upper limit in a few industries. We find that the effect is concentrated only for firms in which the restriction is binding. We also find that the increase in value is greater for firms with weaker corporate governance and smaller for firms that grant a greater portion of equity-based compensation to their executives. These results provide indications that, on average, compensation contracts can be set in a way that does not maximize firm value.

Keywords: executive compensation; governance; optimal contracts

JEL Classification: G30; G38; M12; M48; M52

Suggested Citation

Abudy, Menachem (Meni) and Amiram, Dan and Rozenbaum, Oded and Shust, Efrat, Do Executive Compensation Contracts Maximize Firm Value? Indications from a Quasi-Natural Experiment (August 6, 2019). Columbia Business School Research Paper No. 17-69; 28th Annual Conference on Financial Economics and Accounting. Available at SSRN: https://ssrn.com/abstract=2993052 or http://dx.doi.org/10.2139/ssrn.2993052

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Dan Amiram (Contact Author)

Tel Aviv University - Coller School of Management ( email )

Tel Aviv
Israel

Oded Rozenbaum

George Washington University - School of Business ( email )

Washington, DC 20052
United States
202-994-5992 (Phone)

Efrat Shust

The Department of Management and Economics, The Open University of Israel ( email )

Israel

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