An Examination of Firm-Manager Match Quality in the Executive Labor Market

49 Pages Posted: 13 Nov 2017 Last revised: 7 Sep 2021

See all articles by Matthew Ma

Matthew Ma

Southern Illinois University - Southern Illinois University at Carbondale

Jing Pan

Pennsylvania State University - Department of Accounting

Xue Wang

Ohio State University - Fisher College of Business

Date Written: August 2, 2021

Abstract

We use a three way mixed-effects model to quantify firm-manager match effects in executive compensation, and find that unobservable match heterogeneity explains a considerable proportion of the compensation variation. Firms compensate managers for productivity generated by the efficient match, so we propose a measure of firm-manager match quality based on the match effects in executive pay. We validate the proposed measure by showing that it captures systematic firm-manager complementarities and that it is positively and significantly associated with firm operating performance. We also find significant negative stock market reactions to the news of sudden deaths of CEOs with higher match quality, which helps address the concern that our match quality measure captures managerial rent extraction. Further, we show that match quality is an economically significant factor in CEO turnover decisions, an aspect of the executive labor market that features matching consideration prominently.

Keywords: executive compensation, firm-manager match quality, match effects, mixed effects model

JEL Classification: G30, G32, J24, J31, J33, C23

Suggested Citation

Ma, Matthew and Pan, Jing and Wang, Xue, An Examination of Firm-Manager Match Quality in the Executive Labor Market (August 2, 2021). Available at SSRN: https://ssrn.com/abstract=3067808 or http://dx.doi.org/10.2139/ssrn.3067808

Matthew Ma

Southern Illinois University - Southern Illinois University at Carbondale ( email )

Rehn Hall - Mail Code 4626
Carbondale, IL Illinois 62901-4515
United States

Jing Pan (Contact Author)

Pennsylvania State University - Department of Accounting ( email )

University Park, PA 16802-3306
United States

Xue Wang

Ohio State University - Fisher College of Business ( email )

2100 Neil Avenue
Columbus, OH 43210-1144
United States
614-688-1330 (Phone)
614-292-2118 (Fax)

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