Is it Ability or Size Alone Which Explains High Executive Pay in Large Firms? New Evidence on the 'Cloning' Hypothesis

UNSW School of Banking and Finance Faculty of Commerce Working Paper

21 Pages Posted: 16 Feb 2002

See all articles by Teddy Oetomo

Teddy Oetomo

Schroder Investment Management Indonesia

Peter L. Swan

University of New South Wales (UNSW Sydney; Financial Research Network (FIRN)

Date Written: January 2002

Abstract

We present new direct empirical evidence in support of Rosen's (1982) 'cloning' hypothesis, explaining the overwhelming firm size-executive pay effect in terms of a predicted greater superiority in managerial talent the larger is the firm. We show that executives from better performing firms are more likely to join larger firms. In addition, utilizing 2SLS analysis the performance of the previous employer firm is a significant factor explaining the size of the firm the executive has joined. Remarkably, the prior performance of the firm which previously employed the executive is a more significant determinant of the executive's pay with the current employer than is current firm performance.

Keywords: executive pay, firm size, managerial ability, firm performance, cloning hypothesis

JEL Classification: J3, G3

Suggested Citation

Oetomo, Teddy and Swan, Peter Lawrence, Is it Ability or Size Alone Which Explains High Executive Pay in Large Firms? New Evidence on the 'Cloning' Hypothesis (January 2002). UNSW School of Banking and Finance Faculty of Commerce Working Paper, Available at SSRN: https://ssrn.com/abstract=300765 or http://dx.doi.org/10.2139/ssrn.300765

Teddy Oetomo

Schroder Investment Management Indonesia ( email )

31 Gresham Street
London, EC2V 7QA
United Kingdom

Peter Lawrence Swan (Contact Author)

University of New South Wales (UNSW Sydney ( email )

School of Banking and Finance
UNSW Business School
Sydney NSW, NSW 2052
Australia
+61 2 9385 5871 (Phone)
+61 2 9385 6347 (Fax)

HOME PAGE: http://https://www.business.unsw.edu.au/our-people/peterswan

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

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