Organization Capital and Executive Performance Incentives

Journal of Banking & Finance, Forthcoming

50 Pages Posted: 9 Jan 2021

See all articles by Mingze Gao

Mingze Gao

University of Sydney Business School

Henry Leung

University of Sydney Business School; Financial Research Network (FIRN)

Buhui Qiu

University of Sydney Business School; Financial Research Network (FIRN)

Date Written: November 17, 2020

Abstract

We conjecture that a firm’s organization capital (OC) has a substitution effect on its executive pay-for-performance sensitivity (PPS) and empirically document a robust and significant substitution effect of OC on executive PPS. We use state-level unemployment insurance benefits as an instrumental variable for OC and show that the documented OC-PPS substitution effect is likely causal. Results are also robust to a stacked difference-in-differences estimation approach based on a quasi-natural experiment of exogenous CEO turnovers due to health-related issues. Our findings strongly suggest that greater OC substitutes for costly executive incentive compensation to sustain firm productivity and increase shareholder wealth.

Keywords: Organization Capital; Executive Pay-for-Performance Sensitivity

JEL Classification: G34, J33

Suggested Citation

Gao, Mingze and Leung, Henry and Qiu, Buhui, Organization Capital and Executive Performance Incentives (November 17, 2020). Journal of Banking & Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=3734710

Mingze Gao

University of Sydney Business School ( email )

Cnr. of Codrington and Rose Streets
Sydney, NSW 2006
Australia

Henry Leung

University of Sydney Business School ( email )

402, H69
The University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Buhui Qiu (Contact Author)

University of Sydney Business School ( email )

Room 513, The Codrington Building
The University of Sydney
Sydney, NSW 2006
Australia
+61 2 9036 6435 (Phone)
+61 2 9351 6461 (Fax)

HOME PAGE: http://sydney.edu.au/business/staff/buhuiq

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

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