Local Community's Social Capital and CEO Pay Duration

55 Pages Posted: 8 Jul 2021 Last revised: 13 Jan 2024

See all articles by Zhenjiang Gu

Zhenjiang Gu

Neoma Business School

Jeong-Bon Kim

Simon Fraser University; City University of Hong Kong

Louise Yi Lu

Australian National University

Yangxin Yu

City University of Hong Kong

Date Written: September 1, 2018

Abstract

In this study, we examine the impact of social capital surrounding firms’ headquarters on their CEOs’ pay duration, reflected by the vesting periods of the short-term and long-term components in their annual compensation. Our analysis reveals that CEO pay duration increases with the level of social capital in the county in which firms are headquartered. We further find that this effect is more pronounced when CEOs are more likely to be short-term oriented, suggesting that under the influence of local community’s social capital, the board of directors uses longer pay duration to better align CEOs’ interests with long-term shareholder value. Our results are robust to a variety of additional tests and a smaller sample of firms that had relocated their headquarters to communities with a different level of social capital. Overall, our findings are consistent with the view that social capital incentivises firms to be long-term oriented and refrain from short-term opportunistic activities, and this lengthens CEO pay duration.

Keywords: social capital; executive compensation; CEO pay duration

JEL Classification: G30, M12, Z13

Suggested Citation

Gu, Zhenjiang and Kim, Jeong-Bon and Lu, Louise Yi and Yu, Yangxin, Local Community's Social Capital and CEO Pay Duration (September 1, 2018). Available at SSRN: https://ssrn.com/abstract=3881495

Zhenjiang Gu

Neoma Business School ( email )

1 Rue du Maréchal Juin
Mont-Saint-Aignan, Seine-Maritime 76130
France

Jeong-Bon Kim

Simon Fraser University ( email )

8888 University Drive
Burnaby, British Colombia V5A 1S6
Canada

City University of Hong Kong ( email )

Department of Accountancy
83 Tat Chee Avenue
Kowloon Tong
Hong Kong
852-3442-7909 (Phone)

Louise Yi Lu

Australian National University ( email )

Yangxin Yu (Contact Author)

City University of Hong Kong ( email )

Hong Kong

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