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CEO Compensation and Shareholder Value Orientation Among Large US Firms

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  • TAEKJIN SHIN

    (University of Illinois, USA)

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    Abstract

    The rise of shareholder value orientation among US firms has been studied extensively during the past few decades as a key component of financialisation. The firm-level mechanisms of how such institutional changes have affected firm behaviours are not well understood, however. This study examines the relationship between the shareholder value orientation of firms and financial rewards for the executive managers who run those companies. Using compensation data for 290 CEOs for an 11-year period, I demonstrate that CEOs at the firms with the appearance of shareholder value orientation – such as monitoring and incentive-alignment mechanisms – receive greater compensation than non-shareholder-value-orientation CEOs. Moreover, when the firms strengthen the appearance of shareholder value orientation, CEO pay increases the subsequent year. This suggests that firms adopt monitoring and incentive-alignment mechanisms in order to gain the appearance of shareholder value orientation rather than to curb executive compensation. By employing such symbolic management tactics, top managers at such firms earn greater legitimacy, a better reputation, and a higher valuation of the firms and executive talent. The findings suggest that executive compensation has played an important role in providing incentives for top managers to make strategic decisions that conform to the shareholder value maximisation principle.

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    File URL: http://www.esr.ie/vol%2043_4/03%20Taekjin%20Shin%20article.pdf
    File Function: First version,2012
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    Bibliographic Info

    Article provided by Economic and Social Studies in its journal Economic and Social Review.

    Volume (Year): 43 (2012)
    Issue (Month): 4 ()
    Pages: 535-559

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    Handle: RePEc:eso:journl:v:43:y:2012:i:4:p:535-559

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    Web page: http://www.esr.ie

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    1. Brandon Julio & David L. Ikenberry, 2004. "Reappearing Dividends," Journal of Applied Corporate Finance, Morgan Stanley, vol. 16(4), pages 89-100.
    2. Faulkender, Michael & Yang, Jun, 2010. "Inside the black box: The role and composition of compensation peer groups," Journal of Financial Economics, Elsevier, vol. 96(2), pages 257-270, May.
    3. Jensen, Michael C & Murphy, Kevin J, 1990. "Performance Pay and Top-Management Incentives," Journal of Political Economy, University of Chicago Press, vol. 98(2), pages 225-64, April.
    4. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," Journal of Economic Perspectives, American Economic Association, vol. 17(3), pages 49-70, Summer.
    5. Elsaid, Eahab & Davidson III, Wallace N., 2009. "What happens to CEO compensation following turnover and succession?," The Quarterly Review of Economics and Finance, Elsevier, vol. 49(2), pages 424-447, May.
    6. Lucian Bebchuk & Yaniv Grinstein, 2005. "The Growth of Executive Pay," NBER Working Papers 11443, National Bureau of Economic Research, Inc.
    7. Brian R. Cheffins, 2003. "Will Executive Pay Globalise Along American Lines?," Corporate Governance: An International Review, Wiley Blackwell, vol. 11(1), pages 8-24, 01.
    8. Brian J. Hall & Kevin J. Murphy, 2003. "The Trouble with Stock Options," NBER Working Papers 9784, National Bureau of Economic Research, Inc.
    9. Jay C. Hartzell & Laura T. Starks, 2003. "Institutional Investors and Executive Compensation," Journal of Finance, American Finance Association, vol. 58(6), pages 2351-2374, December.
    10. Brian J. Hall & Jeffrey B. Liebman, 1997. "Are CEOs Really Paid Like Bureaucrats?," NBER Working Papers 6213, National Bureau of Economic Research, Inc.
    11. Fama, Eugene F & Jensen, Michael C, 1983. "Separation of Ownership and Control," Journal of Law and Economics, University of Chicago Press, vol. 26(2), pages 301-25, June.
    12. Henry Hansmann & Reinier Kraakman, 2000. "The End Of History For Corporate Law," Yale School of Management Working Papers ysm136, Yale School of Management, revised 01 Feb 2001.
    13. Stuart L. Gillan & Laura T. Starks, 2007. "The Evolution of Shareholder Activism in the United States," Journal of Applied Corporate Finance, Morgan Stanley, vol. 19(1), pages 55-73.
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