Abstract
This paper analyzes the impact of the managerial ability and level of compensation on firm value in small and medium enterprises. The ability of managers is important for the sustainability and growth of small and medium enterprises because they lack awareness of resources, technology, and reputation compared to large enterprises. The managerial ability is the ability to efficiently utilize resources and choose the investment plan with the highest future net cash flows. Managerial ability is also an indicator of the level of compensation for executives. Therefore, the level of executive compensation can help a firm value or growth if it is based on managerial abilities. In addition, high executive compensation standards can be an opportunity or motivation to work hard for the wealth of companies and shareholders. We analyzed 1872 small and medium-sized companies listed on the Korean stock market to achieve the purpose of the research. We analyzed the accounting period of 6 years from 2012 to 2017. Our results have had a positive impact on firm value with executive compensation. In groups with excellent managerial skills, executive compensation has had a positive (+) impact on firm value. However, executive compensation did not have a significant impact on firm value in groups with poor managerial skills. These results validate that the CEO’s role in small and medium enterprise is important and that the level of compensation for executives is important to motivate. It also suggests that executive compensation cannot affect the firm value in groups with low managerial abilities.
Highlights
Executives make strategic decisions that are important to the operation of the enterprise and plan, direct, and control the enterprise [1]
It presented the consequences of the impact in major variables, executive compensation, and managerial capabilities on the relationship with firm value
We extended the results of the preceding study to verify the impact of managerial abilities on the relationship between executive compensation and firm value
Summary
Executives make strategic decisions that are important to the operation of the enterprise and plan, direct, and control the enterprise [1]. Prior studies of executive compensation report that it has a positive impact on managerial performance or firm value because executive compensation generally reduces opportunistic behavior and solves agency problems. In terms of the managerial entrenchment hypothesis, it was explained that the executives could make efforts focused solely on his or her compensation As a result, such actions by executives could have a negative impact on firm value. If the high executive compensation of SMEs is attributed to their managerial abilities, we believe that the growth value or performance generation will increase their firm value. Prior studies related to executive compensation analyzed whether executive compensation affects performance, capital costs and firm value in terms of managerial ability hypotheses or managerial entrenchment hypotheses.
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