Does Social Capital Mitigate Agency Problems? Evidence from Chief Executive Officer (CEO) Compensation
62 Pages Posted: 4 Oct 2018
Date Written: September 26, 2018
We find that social capital, as captured by secular norms and networks surrounding corporate headquarters, is negatively associated with total and equity-based CEO compensation. This relation is robust in tests for omitted variables, in instrumental-variable regressions, and in regressions using a propensity score-matching sample. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards; and, social capital lessens the accretive effect of CEO power on CEO compensation. We conclude that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation setting.
Keywords: Executive compensation, Opportunistic timing, Backdating, Social capital, Social norms
JEL Classification: D23, J33, J44, M12, Z13
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