CEO Compensation and Risk of Turnover: Evidence from CEO Divorce
51 Pages Posted: 17 Jul 2019
Date Written: November 1, 2015
Contrary to the entrenchment view of executive compensation, I find that CEOs with more control over the firm, proxied by higher equity ownership, have smaller compensation packages and are less likely to have severance contracts. Despite lower pay, these CEOs have longer tenure and their boards’ replacement decisions are less sensitive to their performance, which is consistent with the view that there is a trade-off between pay and dismissal risk. To mitigate endogeneity concerns, I use divorce as an exogenous negative shock to CEO equity ownership, and find that following a divorce, turnover risk goes up and pay increases significantly.
Keywords: CEO Ownership, Compensation, Turnover Risk, Severance Contracts, Corporate Governance
JEL Classification: G30, G32, G34, J31, J33
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