Externalities in the CEO Market and Optimal Regulation on Board Independence

38 Pages Posted: 10 Aug 2017  

Zhan Li

University of Winnipeg

Date Written: August 7, 2017

Abstract

This paper discusses CEO compensation, shareholder value, and optimal regulation in the market for CEOs. Shareholder value increases and CEO compensation decreases with own firm and the other firm's board independence. When shareholders choose board independence, they fail to internalize the positive externality of higher board independence, sets too low board independence, overpays the CEO, and sets too weak corporate governance. This suggests that shareholder activism cannot substitute regulations. However, under the current regulation of mandating minimum board independence, shareholders still set too low board independence compared with the first best level.

Keywords: Board Independence, Shareholder Value, CEO Compensation

JEL Classification: G34, J33, D82

Suggested Citation

Li, Zhan, Externalities in the CEO Market and Optimal Regulation on Board Independence (August 7, 2017). Available at SSRN: https://ssrn.com/abstract=3014694

Zhan Li (Contact Author)

University of Winnipeg ( email )

Winnipeg, Manitoba R3B 2E9
United States

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