High Executive Compensation Research Articles

More Money, More Problems? Implications of Excess Cash in Nonprofit Hospitals

This study examines the implications of excess cash in nonprofit hospitals. Using a nationally representative sample of hospitals, I benchmark nonprofit cash holdings against for-profit cash holdings, and find that nonprofit hospitals hold significantly more cash. I consider three potential uses of excess cash in nonprofit hospitals: (a) investment in fixed assets, (b) increased charity care provision, and (c) higher executive compensation. I find that excess cash is associated with investments in fixed assets but not with increased charity care provision. Moreover, I find a positive relationship between excess cash and growth in CEO compensation. The results suggest that while nonprofit hospitals may accumulate cash to finance fixed assets, some of the accumulated cash may be diverted toward executive compensation. Overall, concerns regarding agency problems in nonprofit organizations may not be unfounded.

Advancing understanding of ESG score and executive compensation relationships in the Indian context

This study examines the impact of environmental, social, and corporate governance (ESG) performance metrics on executive compensation in India using a sample of top-listed firms from 2007 to 2021 and controls for various firm-level characteristics. Findings show that a higher ESG score is associated with higher executive compensation. The subsample analyses examines how business-group affiliations and environmental sensitivity affect executive compensation. Results reveal that business-group affiliated firms with higher ESG scores tend to have higher executive compensation than nonaffiliated firms. Moreover, environmentally sensitive firms with higher governance pillar scores, which represent better governance practices, show higher executive compensation. Finally, high ESG scores and executive compensation is associated with better firm performance.

Executive compensation, risk and performance: evidence from the USA

Purpose Given the serious question raised by the subprime of the 2008 global financial crisis over the rising practices of excessive rewarding of executives in the USA and European firms, the executive pay-performance nexus has emerged as a popular topic of debate in the contemporary corporate finance research. Conducted mostly on the Anglo-Saxon contexts, research outcomes have been inconclusive and dichotomous. Considering this backdrop, this study aims to investigate the endogenous relationship between executive compensation and risk taking in the context of the USA. Design/methodology/approach Using a large sample of non-financial firms from 2010 to 2020 based on panel data and two-stage least square regression. In this study, the riskier corporate decision is measured as book leverage and ratio of R&D expense to total assets. Chief executive officers’ (CEO) experience and age are used as instrumental variables, and these are expected to influence compensation incentives and, hence, affect firm riskiness indirectly. Firm size, return on assets and CEO turnover are reported to affect compensation and corporate decisions, therefore, included as control variables. Given that higher executive compensation is related to riskier corporate decision in firms, this study incorporates total wealth (i.e. accumulated equity related compensation) as an additional proxy of compensation, and this selection is justifiable by the perfect contracting notion of the agency theory. Findings The results of this study show a significant positive and increasing nexus among compensation and riskier corporate decisions. Besides, the compensation level proxied through the percentage of each form of compensation in total compensation is very important as greater equity and greater salary diminishes risk taking. Practical implications The outcomes of this study have useful implications for firm stakeholders and policymakers. Originality/value The level of pay measured by the percentage of each type of compensation in total compensation is of utmost importance as it can increase or decrease risk taking in corporate decisions.

Central bank lending facility and investment efficiency of non-SOEs: evidence from China

Despite China's increasing use of central bank lending facilities over the past decade, their effectiveness and economic impacts on the real economy remain unclear. We examine the effect of the medium-term lending facility (MLF), a representative of central bank lending facilities in China, on the investment efficiency of non-state-owned enterprises (non-SOEs) during 2014: Q3–2020: Q4. We find that increased liquidity through MLF operations improves the investment efficiency of Chinese non-SOEs by reducing their credit constraints, agency costs, and operating risk. The results hold even after controlling for the endogeneity of central bank lending facilities. We also show that the effect is more pronounced for non-SOEs with smaller sizes and higher executive compensation and those in markets with weaker banking competition and financial development. Our findings suggest that lending facility measures can be a practical approach to address the limitations of traditional policy frameworks and support private economic activities.

Does political inspection promote corporate green innovation?

Green innovation is an effective approach to breaking resource availability and environment protection constraints that firms face. China has set up a political inspection team to fight against corruption and deepen state-owned firm reform in recent years. From 2013 to 2015, inspections, as exogenous events, made great achievements in regulating firm behavior. This regulation may exert an effect on green and innovative development in China. Therefore, we adopt the event of political inspection of state-owned firms as a quasi-natural experiment and examine the impact of such an inspection on firm green innovation using data from listed Chinese state-owned enterprises. Findings show that political inspection enhances corporate green innovation. The effect is more pronounced for firms with higher executive compensation and institutional ownership. Political inspection promotes firm green innovation by alleviating financing constraints and reducing rent-seeking. Our study suggests that political inspection, as an external shock, is key to promoting firm green innovation.

Overseas compliance risk prevention for multinational corporations in a law and economics perspective: empirical evidence from Chinese MNCs

PurposeThis paper aims to investigate whether executive compensation and internal control can prevent overseas compliance risks through the mediating influence of multinational corporation (MNC) legitimacy and the moderating role of institutional distance.Design/methodology/approachBased on a law and economics perspective and the “bad apple,” the “red barrel” and the “bad cellar” theory of business misconduct, this paper constructs a systematic framework of “compliance motivation MNC legitimacy overseas compliance risk prevention” from the individual, organizational and systematic levels and uses data of Chinese MNCs for empirical analysis.FindingsEmpirical data from Chinese MNCs show that overseas compliance risks are comprehensively affected by the factors of the individual, organizational and systematic levels. Higher executive compensation and internal control will reduce MNCs’ overseas compliance risks through MNC legitimacy acquisition; institutional distance hinders the positive effect of internal control on MNC legitimacy and therefore aggravates overseas compliance risks.Practical implicationsThis paper contributes to the understanding of the overseas law-abiding and offence behavior of MNCs from a law and economics perspective and offers valuable insights on how to prevent the ever-increasing overseas compliance risks.Originality/valueAlthough the literature has analyzed the factors of compliance behavior, they are not interrelated, let alone integrated in a systematic risk prevention framework. This paper applies a law and economic analysis framework to the study of the overseas compliance risks for the first time.

Effect of SME’s Managerial Ability and Executive Compensation on Firm Value

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.

The impact of relative CEO compensation on not-for-profit contributions

PurposeThe authors extend research suggesting that external funders reduce their contributions to not-for-profit (NFP) organizations in response to media-reported CEO compensation levels.Design/methodology/approachEmploying a maximum archival sample of 44,807 observations from US Form 990s, the authors comprehensively assess the extent that high relative NFP CEO compensation is associated with decreases in future contributions.FindingsThe authors find that donors and grantors react negatively to high relative CEO compensation but do not react adversely to high absolute executive compensation. Contributors seem to take issue with CEO compensation when they perceive it absorbs a relatively large portion of the organizations’ total expenses, which may hinder the NFP’s mission. Additional findings suggest that excess cash held by the NFP significantly exacerbates the negative baseline relationship between future contributions and high relative CEO compensation. Finally, both individual donors and professional grantors are sensitive to cash NFP CEO compensation levels, but grantors are more sensitive to CEO noncash compensation.Research limitations/implicationsThe authors’ data are focused on larger NFP organizations, so this limits the generalizability of the study. Furthermore, survivorship bias potentially influences their time-series investigations because a current year large-scale decrease in funding due to high relative CEO compensation may cause some NFP firms to drop out of the sample the following year due to significant funding reductions.Originality/valueThe study makes three noteworthy contributions to the literature. First, the study documents that the negative association between high relative CEO compensation levels and future donor and grantor contributions is much more widespread than previous literature suggested. Second, the authors document that high relative CEO compensation levels that trigger reductions in future contributions are significantly exacerbated by excess cash held by the NFP. Finally, the authors find that more sophisticated grantors are more sensitive to noncash CEO compensation levels as compared with donors.

Environmental regulation, firms' bargaining power, and firms' total factor productivity: evidence from China.

The relationship between environmental regulation and firms' total factor productivity (TFP) has always been a hot topic in environmental economics, but the conclusions are still mixed. Employing a sample of 14,375 firm-year observations in China from 2010 to 2018, our research explores whether and when environmental regulation could trigger firms, to enhance TFP. The available evidence leads us to cautiously conclude that: (1) Environmental regulation notably improves firms' TFP, the conclusion still holds after alleviating the endogenous problems and a battery of robustness tests. (2) Firms' bargaining power significantly weakens the effect of environmental regulation on firms' TFP. (3) Compared with non-state-owned firms and non-heavy-polluting industries, environmental regulation has a greater impact on state-owned firms and heavy-polluting industries; higher executive compensation does not motivate firms to improve TFP. Compared with firms headquartered in non-provincial capital cities, environmental regulation has a greater impact on firms' TFP in provincial capital cities. Overall, the findings of our research are extremely relevant for the governments, investors, and firms' managers; this paper provides China's micro-firm-level evidence for the Porter hypothesis.

Excessive CEO Compensation and Effort Contributions in the Non-Profit Sector

This study examines whether high executive compensation has adverse effects on volunteers' willingness to make labor contributions to nonprofit organizations. Using compensation information in IRS Form 990, we find that high CEO compensation negatively influences the number of future volunteers working for the nonprofit organization if executive compensation is considered to be excessively high, or if there is media attention regarding the CEO's compensation. These effects are most pronounced in smaller and more charitable organizations. Hence, our study presents previously undocumented implications of high executive compensation levels in the nonprofit sector.

Study of executive compensation of public and private sector enterprises in India - impact on corporate governance

Executive compensation in India is strictly legislated and regulated. The purpose of this paper is to evaluate the executive compensation between private and public sector companies in the NIFTY 50 Index companies after the implementation of corporate governance reforms in India. This study is important because the Government of India is doing business using taxpayers money in owning and managing public sector companies, thus it is incumbent that these public sector companies are run efficiently and effectively. The study establishes that companies in the private sector pay significantly high executive compensation than that of companies in the public sector in terms of CEO pay and total executive pay thereby impacting corporate governance in India. An implication of this study is that it establishes huge gaps in executive compensation in the Indian corporate landscape, thus, posing challenges to governance of public sector companies in India. It makes a case for governance reforms in terms of executive compensation for top management of public sector companies.

Does regional air quality affect executive turnover at listed companies in China?

This paper studies whether regional air quality affects executive turnover in China. Executives can change locations when they are concerned about the health risks from prolonged exposure to poor air quality as tenure extends. Poor air quality can lead to poor company performance, which can also lead to forced executive turnover. Using air quality data of prefecture-level cities and executive data of listed companies from 2004 to 2014, we find that poor regional air quality significantly increases executive turnover. The impact is more pronounced when executive tenure is longer but not when company performance is poorer, suggesting that executives’ concern about air quality is the channel of the impact. High executive compensation does not mitigate the impact, whereas political incentives at state-owned listed companies do. Our results indicate the role of regional air quality in ensuring the stability of company executives and improving the regional competitiveness for the labor force in China.

The impact of board secretaries’ excess compensation on corporate disclosure quality

Purpose Extensively public concern on “Huge Executive Compensation” makes it urgent to investigate the reasonability of high executive compensation. The purpose of this paper is to explore the effectiveness of compensation contracting based on the specific responsibility of executives. More specifically, this paper is to examine whether high compensation is helpful to mitigate agency problems. Design/methodology/approach Considering that board secretaries of listed companies are responsible for information disclosure in China, this paper examines the effect of board secretaries’ excess compensation on firms’ disclosure quality using listed company data from 2007 to 2015. The first measure of disclosure quality is based on the disclosure violation behavior of firms, and the second is KV value that represents the extent to which the investors relay on the stock trading volume. To provide additional confidence that the findings are robust, this paper further conducts two indirect tests based on rumors and cost of equity capital. Findings The results show that board secretaries’ excess compensation is negatively associated with the probability of information disclosure violation and also negatively associated with firms’ KV value, suggesting firms that pay high compensation to their information providers are more likely to provide high-quality disclosures. Besides, this paper further finds that board secretaries’ excess compensation is negatively related to the incidence of rumors, the number of rumors incurred or the cost of equity capital. Research limitations/implications Overall, the findings provide support to the efficient contracting of executive compensation, which implies that highly paid board secretaries would be better information providers than those poorly paid. Practical implications This paper provides empirical evidence that firms’ disclosure quality can be improved by modifying the compensation contract of information providers. This may indicate a new way to improve the quality of disclosures, so as to mitigate the agency problem. Social implications In spite of the public criticism on executive excess compensation, the high compensation is not always a signal of manipulation, collusion and self-interest. It also can be a signal of individual talents and great efforts. Board secretaries are worth to be highly paid if they can improve firms’ disclosures, thereby reducing the incidence of rumors and reducing the cost of equity capital. Originality/value This paper is the first research to examine the effectiveness of compensation contracting based on information providers’ disclosure responsibility in the Chinese context. It documents a positive relation between board secretaries’ excess compensation and corporate disclosure quality.

Executive Compensation, Sustainability, Climate, Environmental Concerns, and Company Financial Performance: Evidence from Indonesian Commercial Banks

This research investigates whether executive compensation is designed to motivate managers to pursue corporate sustainability (CS) concerns as measured by Global Reporting Initiative (GRI) 3.1 disclosure indicators in Indonesian listed commercial banks throughout 2007–2014. In addition, this study examines the impact of executive compensation, climate, and environmental concerns on both financial health and market value performance as components of company financial performance (CFP). This study, based on an agency theoretic and stakeholder positions, focuses on banking entities in a developing country, and enriches the literature by examining topics through the application of the Throughput Model that captures different pathways and stages. The results suggest that higher executive compensation in Indonesian banking entities may motivate management to do more for climate and environmental concerns, as well as to enhance CFP. Contrary to expectations, climate and environmental concerns have a significant negative impact on both financial health and market value performance. This implies that Indonesian banking companies may tend to conduct corporate responsibility activities only for their own-sake as an altruism motive, which influences the reduction of firms’ financial performance. This study comes to the conclusion that CS concern depicts a weakening factor as well as a partial mediator in the relationship between executive compensation and financial health performance.

Is There An Industry Effect in Executive Compensation? Evidence from Aerospace/Defense and Leisure/Hospitality Industry

The objective of this study is to compare the executive compensation of two industries that are diametrically opposites in terms of dependence on government: The Aerospace/Defense industry versus Leisure/Hospitality industry. The financial crisis brought the issue of the executive compensation to the attention of government. Congress has often tried to control executive compensation through mandated public disclosures of private contracts, restrictive tax policy, and direct interference with corporate governance. Recent studies show a reduction in donations to nonprofits subsequent to disclosure of high executive compensation. In the same light, since governments are the primary customers of defense industry, we suspect that the issue of high levels of executive compensation will factor into contract negotiations. The study finds a negative relationship, albeit weak, between the Aerospace/Defense industry variable and executive compensation as compared to the Leisure/Hospitality industry.

Do organizational and political-legal arrangements explain financial wrongdoing?

The 2008 financial crisis was a systemic problem with deep-rooted structural causes that created opportunities to engage in financial malfeasance, a form of corporate wrongdoing. However, few quantitative studies exist on the effects of organizational and political-legal arrangements on financial malfeasance. In this paper, we examine the effects of organizational and political-legal arrangements that emerged in the 1990s in the FIRE sector (i.e., financial, insurance, and real estate) on financial malfeasance. Our historical contextualization demonstrates how changes in the political-legal arrangements facilitate the emergence of new corporate structures and opportunities for financial malfeasance. Our longitudinal quantitative analysis demonstrates that US FIRE sector corporations with a more complex organizational structure, larger size, lower dividend payment, and higher executive compensation are more prone to commit financial malfeasance.

The impacts of accrual-based and real earnings management on executive compensation: evidence from Chinese public firms in the private sector

This paper investigates whether high CFO or CEO compensation follows earnings management practices in Chinese public firms in the private sector. We find that while accrual-based earnings management does not impact executive compensation, real earnings management leads to high executive compensation. In addition, the effect of real earnings management is particularly strong for CEO pay, consistent with the notion that CEO pressure is the key driver of earnings management. Moreover, we find that this association is more pronounced for firms with a powerful CEO as well as for firms with a large wedge between control and cash flow rights.

Governance and Taxes: Evidence from Regression Discontinuity (Retracted)

ABSTRACT: We implement a regression discontinuity design to examine the effect of institutional ownership on tax avoidance. Positive shocks to institutional ownership around Russell index reconstitutions lead, on average, to significant decreases in effective tax rates (ETRs) and greater use of international tax planning using tax haven subsidiaries. These effects are smaller for firms with initially strong governance and high executive equity compensation, suggesting poor governance as an explanation for the undersheltering puzzle, and appear to come about as a result of improved managerial incentives and increased monitoring by institutional investors. Furthermore, we observe the largest decreases among high ETR firms, and increases for low ETR firms, consistent with institutional ownership pushing firms toward a common level of tax avoidance.

Governance and Taxes: Evidence from Regression Discontinuity

We implement a regression discontinuity design to examine the effect of institutional ownership on tax avoidance. Positive shocks to institutional ownership around Russell index reconstitutions lead, on average, to significant decreases in effective tax rates (ETR) and prioritisation of cash over book-tax savings. They also lead to greater use of international tax planning using tax haven subsidiaries. These effects are smaller for firms with initially strong governance and high executive equity compensation, suggesting poor governance as an explanation for the undersheltering puzzle. Furthermore, we observe the largest decreases among high ETR firms, and increases for low ETR firms, consistent with institutional ownership pushing firms towards a common level of tax avoidance.

Is Tax Avoidance Associated with Economically Significant Rent Extraction among U.S. Firms?

AbstractTwo influential papers in the tax‐avoidance literature (Desai and Dharmapala ; Desai, Dyck, and Zingales ) argue that aggressive forms of tax avoidance employ technologies that complement managerial rent extraction, and provide supporting evidence from firms in Russia. Several papers rely on this theory to motivate and interpret tests in a U.S. setting, but these tests are open to multiple interpretations. This paper investigates the extent to which shareholders of U.S. companies are affected by any such rent extraction. The evidence is inconsistent with the tax‐avoidance technologies employed by U.S. firms allowing managers to extract sufficient rents to negatively affect future performance. Additional tests on poorly governed U.S. firms find no evidence that tax‐avoidance activities relate positively to either overinvestment or higher executive compensation, and no evidence that either complexity or the Sarbanes‐Oxley Act moderates the relation between future performance and tax avoidance. The evidence suggests that caution is warranted in interpreting evidence according to this theory in a U.S. setting.