Common Ownership and CEO Pay Duration
55 Pages Posted: 13 Aug 2021 Last revised: 5 May 2022
Date Written: May 5, 2022
We examine how common ownership affects managerial compensation horizons. We find that common ownership is positively associated with CEO pay duration. Further evidence supports the notion that the threat of exit under common ownership has a more pronounced effect on managerial behavior than the voice. Common owners use long-duration pay to mitigate the managerial myopia inadvertently exacerbated by governance through the threat of exit. Specifically, we find that the positive relationship between common ownership and pay duration is mainly driven by active common owners, and strengthens with higher liquidity, greater information asymmetry, and in states with stronger non-compete agreement enforceability. Long-duration pay under common ownership is effective in curbing managerial myopia as it improves firm long-term performance and reduces stock price crash risk. Using financial mergers as exogenous shocks for a difference-in-differences analysis, we show that our results are robust to endogeneity concerns.
Keywords: Common Ownership, Pay Duration, Corporate Governance, Managerial Myopia
JEL Classification: G30, G34, J33
Suggested Citation: Suggested Citation