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CEO-Firm Match and Principal-Agent Problem

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Author Info
Li, Fei
Ueda, Masako

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Abstract

We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 5119.

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Date of creation: Jul 2005
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Handle: RePEc:cpr:ceprdp:5119

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Keywords: Principal-Agent problem; sorting;

Find related papers by JEL classification:
G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Christian Grund & Dirk Sliwka, 2006. "Performance Pay and Risk Aversion," Discussion Papers 101, SFB/TR 15 Governance and the Efficiency of Economic Systems, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich. [Downloadable!]
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