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
Date Written: March 2019
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
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