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The governance of director compensation

Author

Listed:
  • Fang, Lily
  • Huang, Sterling

Abstract

The average total compensation of directors in U.S.-listed companies was $342,030 in 2020, 5.06 times the median household income. Directors set their own pay, giving rise to potential self-dealing. We argue and document that in the presence of self-dealing, external mechanisms such as legal standards act as effective means of governance. Following a landmark Delaware court ruling that subjected director pay to a more stringent legal standard, Delaware-incorporated firms reduced director compensation relative to non-Delaware firms and experienced positive and non-transient stock price reactions. Our results indicate that proper governance of director compensation enhances firm value.

Suggested Citation

  • Fang, Lily & Huang, Sterling, 2024. "The governance of director compensation," Journal of Financial Economics, Elsevier, vol. 155(C).
    • Handle: RePEc:eee:jfinec:v:155:y:2024:i:c:s0304405x24000369
    DOI: 10.1016/j.jfineco.2024.103813
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    More about this item

    Keywords

    Director compensation; Determinants; Self-dealing; Natural experiment; Seinfeld v. Slager;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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