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Board of Directors endogenous perspective of the CEO pay and performance of the company

Author: HuangTong
Tutor: ChenJianAn
School: Fudan University
Course: Finance
Keywords: CEO pay Rent-seeking Corporate Performance Endogeneity of the board Lake Wobegon Effect
CLC: F272.92;F276.6
Type: Master's thesis
Year: 2011
Downloads: 74
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Abstract


CEO pay decision is an important aspect of corporate governance and corporate financial research. Research on CEO pay and corporate performance is based on two main lines:First, it demonstrated the inherent influence of corporate performance to the board, and tests the impact of corporate performance on CEO pay. The second is revealing the impact of CEO pay on corporate performance from the perspective of corporate governance, test whether improving the corporate governance structure can improve corporate performance. The research on the relationship of CEO pay, rent-seeking and corporate performance, the endogeneity of the board have been studied a lot both empirically and theoretically. This paper first summarizes some research in the two areas, and then reviews the research on the relationship between the two.Theoretically, this paper first establish the model of CEO utility maximization under the endogenous framework of the board, and then analyze the first and the second order condition of maximization the value of corporate, at last the paper combined the analysis of CEO’s utility maximization and corporate’s value maximization.Empirically, the paper used data from 2000 to 2009 of listed companies as a sample for empirical analysis. First, the paper reviews the research literature at home and abroad, used Tobin’s Q and ROA indicator to measure the rate of return on equity, used CEO pay as a variable to analyze the influence of CEO pay on firm performance, and choose main control variables under the consideration of main theory on corporate finance area to establish cross- regression model for testing the sensitivity of corporate performance on CEO pay. The paper further considered the introduction of the best board of directors would produce endogeneity between the variables, respectively use two-stage least squares and two-stage GMM to remove the internal factors to check the relationship between the two; the paper also considered the lag term of CEO pay in the regression model, using dynamic panel data to validate the relationship between variables again, and get the same conclusion. At last, the paper validate whether CEO pay of Chinese listed companies has Lake Wobegon effect for the first time.By analyzing the empirical results, the article has concluded:(1) optimal performance pay sensitivity is inversely proportional with corporate debt, and direct proportional with the board’supervision. (2) Under the constraints of maximizing firm value and minimizing governance cost, there is an optimal board structure, this board is the discretionary result of oversee cost, board size and independence, and will make the CEO seeking space’s impact on board size and the independent directors become positive. (3) The CEO pay of state-owned enterprises is negatively related to the board size, CEO pay of private enterprises is negatively related to board size. CEO pay is positively related to the ratio of independent directors, outside directors help to promote the adoption of CEO incentive compensation, and the proportion of outside directors and incentive compensation are positively correlated. Taking into account the expected effects of CEO pay, we can see that 25% of current CEO pay salaries determined by the previous period, while CEO pay of the state-owned enterprises is positively related with last period’s rent-seeking. At last, we verified that there is no existence of the Lake Wobegon effect in Chinese listed companies, but there is inverted U effect between CEO pay and corporate performance, which means incentive excesses.

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CLC: > Economic > Economic planning and management > Enterprise economy > A variety of enterprise and economic > Company
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