Does Social Capital Mitigate Agency Problems? Evidence from Chief Executive Officer (CEO) Compensation

62 Pages Posted: 4 Oct 2018

See all articles by Chun Keung (Stan) Hoi

Chun Keung (Stan) Hoi

Rochester Institute of Technology (RIT) - Department of Accounting and Finance

Qiang Wu

The Hong Kong Polytechnic University

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business

Date Written: September 26, 2018

Abstract

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

Suggested Citation

Hoi, Chun Keung (Stan) and Wu, Qiang and Zhang, Hao, Does Social Capital Mitigate Agency Problems? Evidence from Chief Executive Officer (CEO) Compensation (September 26, 2018). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=3255676

Chun Keung (Stan) Hoi

Rochester Institute of Technology (RIT) - Department of Accounting and Finance ( email )

Saunders College of Business
105 Lomb Memorial Drive
Rochester, NY 14623-5608
United States
585-475-2718 (Phone)
585-475-6920 (Fax)

Qiang Wu (Contact Author)

The Hong Kong Polytechnic University ( email )

Hao Zhang

Rochester Institute of Technology (RIT) - Saunders College of Business ( email )

105 Lomb Memorial Dr.
Rochester, NY 14623
United States

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