The Association of CEO’s Social Connections with CEO’s Excess Return from Compensation Arrangements

Abstract

We investigate whether CEO’s social connections are systematically associated with the financial incentive alignment between the CEO and shareholders. The existing CEO compensation literature provides a mix of empirical evidence on whether rent extraction or shareholder value view dominates. We test these two classic theories in the context of the association of CEO social connections with CEO excess return from compensation. We find a negative association supporting the shareholder value view. Consistent with the shareholder value view, we also find that well-connected CEOs who earn lower excess returns from compensation have a positive impact on future firm performance. Finally, we find that a well-connected CEO who has external connections with the compensation committee members offset the overall effect and earn higher excess returns from compensation. Overall, the results of our study are consistent with the shareholder value view. However, the results also support the rent extraction view when the compensation committee members are a part of the CEO’s social network as the CEO is able to extract personal benefits at the expense of shareholders.