CEO Compensation, Shareholder Rights, and Corporate Governance: An Empirical Investigation

20 Pages Posted: 26 Jul 2006

See all articles by Pornsit Jiraporn

Pornsit Jiraporn

Pennsylvania State University - School of Graduate Professional Studies (SGPS)

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business

Wallace N. Davidson

Southern Illinois University at Carbondale - Department of Finance

Date Written: 2006

Abstract

We investigate whether CEO compensation is influenced by the strength of shareholder rights. Agency theory suggests that CEOs may exploit shareholders when shareholder rights are weak, placing their own private benefits ahead of those of the stockholders. Our evidence reveals that CEOs of firms where shareholder rights are weak obtain more favorable compensation. Higher CEO pay is associated with a higher degree of potential managerial entrenchment. We also examine the change in CEO compensation relative to the change in shareholders' wealth. The evidence shows that when there is an increase in shareholders' wealth, the CEO is able to obtain higher incremental compensation if shareholder rights are weak. On the contrary, when shareholders' wealth falls, there is no corresponding decline in CEO compensation if shareholder rights are weak. Given the empirical evidence, we argue that CEO compensation practices reflect rent expropriation rather than optimal contracting.

Keywords: Compenation, Shareholder Rights, Corporate Governance

JEL Classification: G30, G34, J33

Suggested Citation

Jiraporn, Pornsit and Kim, Young Sang and Davidson, Wallace N., CEO Compensation, Shareholder Rights, and Corporate Governance: An Empirical Investigation (2006). Available at SSRN: https://ssrn.com/abstract=919060 or http://dx.doi.org/10.2139/ssrn.919060

Pornsit Jiraporn (Contact Author)

Pennsylvania State University - School of Graduate Professional Studies (SGPS) ( email )

30 E. Swedesford Road
Malvern, PA 19355
United States
(484) 753-3655 (Phone)

HOME PAGE: http://www.personal.psu.edu/pxj11/index1.html

Young Sang Kim

Northern Kentucky University - Haile/US Bank College of Business ( email )

Dept of Economics and Finance
Highland Heights, KY 41099
United States
859-572-5160 (Phone)
859-572-6627 (Fax)

Wallace N. Davidson

Southern Illinois University at Carbondale - Department of Finance ( email )

Mail Code 4626
Carbondale, IL 62901-4626
United States
618-453-1429 (Phone)
618-453-5626 (Fax)

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