Managerial Incentives and Firm Survival
75 Pages Posted: 11 Feb 2019 Last revised: 12 May 2019
Date Written: April 9, 2019
We find that IPO firms with generously compensated CEOs and large pay disparities in the boardroom have lower failure rates and longer survival time in the periods following the offering. Economically, an interquartile change in the distribution of CEO pay (pay gap) results, on average, in a reduction of the failure risk probability by 21.81% (20.55%). The relationship between CEO pay and IPO survival is strengthened among firms with lower agency conflicts, while the link between pay gap and IPO survival is pronounced when CEO succession planning is more important. Both measures of managerial pay are associated with lower information asymmetry, better valuation, and superior operating performance in the post-IPO market. The results are robust to alternative interpretations and additional tests.
Keywords: Executive Compensation, Pay Gap, IPO Survival, Initial Public Offerings
JEL Classification: G24, G30, G31, G32, J31, J33, L25
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