38 Pages Posted: 10 Aug 2017
Date Written: August 7, 2017
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: 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