Why Are CEOs of Public Firms Paid More Than CEOs of Private Firms? Evidence from the Effect of Board Reforms on CEO Compensation

50 Pages Posted: 3 May 2019

See all articles by Kee-Hong Bae

Kee-Hong Bae

York University - Schulich School of Business

Sadok El Ghoul

University of Alberta - Campus Saint-Jean

Jisok Kang

John Carroll University - Department of Economics & Finance

Albert Tsang

York University - Schulich School of Business

Date Written: March 2019

Abstract

CEOs of public firms earn more than their counterparts in similar private firms. This can either be because rent extraction is easier in public firms than in private firms or because managing a public firm requires additional legal and institutional responsibilities than does managing an otherwise similar private firm. Using corporate board reform events from 29 countries, we find that board reforms toward greater board diligence for public firms increases CEO pay significantly more for public firms than for private firms, which are not subject to those reforms. Following board reforms, CEO pay increases more for public firms that are subject to higher scrutiny, such as larger firms and firms that are followed by more analysts and institutional investors. These results are consistent with the efficient contracting view of CEO compensation but inconsistent with the rent extraction view.

Keywords: CEO Compensation, Corporate Board Reform, Private Firms, Efficient Contracting, Rent Extraction

JEL Classification: G34, G36, M12

Suggested Citation

Bae, Kee-Hong and El Ghoul, Sadok and Kang, Jisok and Tsang, Albert, Why Are CEOs of Public Firms Paid More Than CEOs of Private Firms? Evidence from the Effect of Board Reforms on CEO Compensation (March 2019). Available at SSRN: https://ssrn.com/abstract=3365138 or http://dx.doi.org/10.2139/ssrn.3365138

Kee-Hong Bae (Contact Author)

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100 ext) 20248 (Phone)
416-736-5687 (Fax)

Sadok El Ghoul

University of Alberta - Campus Saint-Jean ( email )

Edmonton, Alberta T6G 2R3
Canada
780-465-8725 (Phone)
780-465-8760 (Fax)

Jisok Kang

John Carroll University - Department of Economics & Finance ( email )

University Heights, OH 44118
United States

Albert Tsang

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada

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