Does CEO Pay Inequality Reflect Poor Corporate Governance? Evidence from the NYSE/NASDAQ Governance Reforms
43 Pages Posted: 29 Jun 2020
Date Written: June 3, 2020
We examine whether high CEO pay inequality, measured by the share of total managerial pay captured by the CEO (CEO pay slice or CPS), is an outcome of poor corporate governance, and its implications for shareholder wealth. We exploit the 2002 NYSE and NASDAQ governance reforms that mandated firms to have majority independent boards as a quasi-exogenous source of variation in the internal governance environment of firms. Results show that CPS decreases following the passage of these exchange listing regulations, for firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for firms that likely suffer from agency conflicts in the pre-regulation period. Overall, our results suggest that poor governance environments are associated with high CPS and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment.
Keywords: CEO pay inequality, NYSE and NASDAQ governance regulations, firm valuation
JEL Classification: G34, G38, M12
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