This dissertation consists of two essays, both co-authored with Ugur Lel. The first essay (Chapter 1) examines whether high CEO pay inequality (CPI), the share of total managerial pay captured by the CEO, 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 CPI decreases following the passage of these exchange listing regulations, but only in firms with entrenched CEOs affected by the exchange listing regulations. Firm value also increases for these firms. These results are robust to a variety of robustness checks such as a matched sample analysis and placebo tests. Overall, our results suggest that poor governance environments are associated with high managerial pay differences and consequently lower firm valuations, supporting the view that high CEO pay inequality reflects managerial entrenchment.
The second essay (Chapter 2) examines whether shareholders use executive compensation channel to align managerial horizon with their investment horizon. We utilize a newly emerged empirical measure, pay duration, to measure managerial horizon. For shareholder horizon, we use the fraction of long-term institutional ownership in the firm. Results show that there is a positive association between long-term institutional ownership and CEO pay duration, suggesting that shareholder horizon is a determining factor in compensation contracts. We address reverse causality using indexer institutions. We also establish a causal link from investor horizon to CEO pay duration using institution mergers as a source of exogenous variation in investor horizon of the firm. We extend our results to hedge fund activism and document a negative relation between hedge fund activism and pay duration, which is consistent with our argument. Overall our results suggest that shareholders structure CEO pay in a way that is consistent with their investment horizon. / Ph. D. / CEOs play a crucial role in today’s financial world. They are the ultimate decision makers in companies and their goal is to maximize the shareholder wealth. Motivating the CEO to work hard and maximize shareholder wealth hinges on optimally designed compensation contracts. Shareholders delegate company directors to design these pay contracts. However, conflicts of interest between directors and CEOs, between shareholders and CEOs, and even among shareholders, affect the design of CEO pay contracts. It is important to study these conflicts of interest and their effect on CEO compensation to ensure well-functioning companies and a fair market.
The objective of the first chapter is to examine whether the CEOs are overpaid when the company directors are not able to monitor the actions and decisions of the CEOs. We document that powerful and established CEOs are overpaid, both in dollar terms and relative to other managers in the company, when they are not properly monitored. We also document that regulations that aim to improve monitoring quality in companies bring CEO pay to fair levels, leading to an increase in company valuations. These findings point out the importance of regulations that improve the governance of companies.
In the second chapter, we examine short-termism (or myopia) in the context of CEO pay. Basically, short-termism is any action that saves today but is costly in future. While short-term shareholders invest in companies for short periods to take advantage of temporary changes in company valuation, long-term investors invest for long periods and aim to benefit from long-term increase in company valuation. We document that the conflict of interest among shareholders with different investment periods is reflected in the design of CEO pay contracts. In particular, CEOs wait more to receive their compensation if the dominant investor type in the company has longer investment period. This finding explains how shareholders use CEO compensation to achieve wealth maximization, highlighting the power and importance of CEO pay contracts.
| Identifer | oai:union.ndltd.org:VTETD/oai:vtechworks.lib.vt.edu:10919/78706 |
| Date | 15 August 2017 |
| Creators | Tepe, Mete |
| Contributors | Finance, Insurance, and Business Law, Lel, Ugur, Easterwood, John C., Shome, Dilip K., Hansen, Thomas Bowe |
| Publisher | Virginia Tech |
| Source Sets | Virginia Tech Theses and Dissertation |
| Detected Language | English |
| Type | Dissertation |
| Format | ETD, application/pdf |
| Rights | In Copyright, http://rightsstatements.org/vocab/InC/1.0/ |
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