Why Are CEOs of Public Firms Paid More Than CEOs of Private Firms? Evidence from the Effect of Board Reforms on CEO Compensation

Abstract

CEOs of public (listed) firms earn more than their counterparts in similar private (unlisted) firms. This can either be because rent extraction is easier in public firms than in private firms, or because managing a public firm involves more legal and institutional responsibilities than managing an otherwise similar private firm. We show that corporate board reforms from 29 countries that strengthen board diligence of public firms result in a significant increase in the pay of CEOs of public firms relative to private firms. This result is consistent with the efficient contracting view of CEO compensation.