Abstract
We study whether social ties between the CEO and the CFO, as proxied by CFO co-option, influences CEO compensation. We define CFO co-option as the appointment of a CFO after a CEO assumes office. We also examine the influence of CFO co-option on compensation when the CEO’s personality is relatively more powerful than the CFO’s, and when the CFO is assigned more decision-making power, which will yield higher CEO compensation if a co-opted and more powerful CFO manages earnings upwards. Consistent with the social network theory (Granovetter, 1973), we find that CEO compensation is relatively higher when the CFO is co-opted. As predicted by the upper echelons theory (Hambrick and Mason, 1984), this effect is more pronounced when the CEO’s personality is relatively more dominant than the CFO’s (as proxied by lower relative voice pitch) and when the CFO is assigned more decision-making power (as proxied by the CFO’s membership on the board of directors). However, the evidence is not entirely supportive of a rent extraction story as the board appears to anticipate the effects of CFO co-option and design the CEO compensation contract to mitigate benefits from earnings management.
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