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Venture capitalist directors and managerial incentives

Author

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  • Litov, Lubomir P.
  • Liu, Xia
  • Megginson, William L.
  • Sitorus, Romora E.

Abstract

We examine the effect of board members with venture capital experience (VC directors) on executive incentives at non-venture-backed public firms. VC directors serving on the compensation committee are associated with greater CEO risk-taking incentives (vega) and pay-for-performance sensitivity (delta). These effects are more substantial if VC directors are from highly reputable VC firms. Using the change of direct flight availability to VC hub cities caused by major airline mergers and annual estimates of VC dry powder per industry as instruments, we show that these results are causal. In addition, VC directors are more focused on growth performance goals in CEO compensation contracts. We also document that prior finding of greater research intensity and innovation when VC directors serve on boards of public firms is partly explained by stronger CEO incentives instilled by such directors. Lastly, we find that having VC directors on nominating and/or governance committees is associated with a higher likelihood of forced CEO turnover.

Suggested Citation

  • Litov, Lubomir P. & Liu, Xia & Megginson, William L. & Sitorus, Romora E., 2024. "Venture capitalist directors and managerial incentives," Journal of Corporate Finance, Elsevier, vol. 89(C).
    • Handle: RePEc:eee:corfin:v:89:y:2024:i:c:s0929119924001135
    DOI: 10.1016/j.jcorpfin.2024.102651
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    More about this item

    Keywords

    Executive compensation; Board of directors; Venture Capital experience;
    All these keywords.

    JEL classification:

    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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