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CEO wage dynamics: Estimates from a learning model

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  • Taylor, Lucian A.

Abstract

The level of Chief Executive Officer (CEO) pay responds asymmetrically to good and bad news about the CEO's ability. The average CEO captures approximately half of the surpluses from good news, implying CEOs and shareholders have roughly equal bargaining power. In contrast, the average CEO bears none of the negative surplus from bad news, implying CEOs have downward rigid pay. These estimates are consistent with the optimal contracting benchmark of Harris and Hölmstrom (1982) and do not appear to be driven by weak governance. Risk-averse CEOs accept significantly lower compensation in return for the insurance provided by downward rigid pay.

Suggested Citation

  • Taylor, Lucian A., 2013. "CEO wage dynamics: Estimates from a learning model," Journal of Financial Economics, Elsevier, vol. 108(1), pages 79-98.
  • Handle: RePEc:eee:jfinec:v:108:y:2013:i:1:p:79-98
    DOI: 10.1016/j.jfineco.2012.11.008
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    Citations

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    Cited by:

    1. Daniel Ferreira & Radoslawa Nikolowa, 2015. "Misallocation of Talent in Competitive Labor Markets," Working Papers 740, Queen Mary University of London, School of Economics and Finance.
    2. Pierre Chaigneau & Nicolas Sahuguet, 2014. "Explaining the Association between Monitoring and Controversial CEO Pay Practices: an Optimal Contracting Perspective," Cahiers de recherche 1406, CIRPEE.
    3. Hermalin, Benjamin E. & Weisbach, Michael S., 2014. "Understanding Corporate Governance through Learning Models of Managerial Competence," Working Paper Series 2014-04, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
    4. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    5. Frydman, Carola & Papanikolaou, Dimitris, 2018. "In search of ideas: Technological innovation and executive pay inequality," Journal of Financial Economics, Elsevier, vol. 130(1), pages 1-24.
    6. Jenter, Dirk & Lewellen, Katharina, 2014. "Performance-Induced CEO Turnover," Research Papers 3054, Stanford University, Graduate School of Business.
    7. Bakke, Tor-Erik & Gu, Tiantian, 2017. "Diversification and cash dynamics," Journal of Financial Economics, Elsevier, vol. 123(3), pages 580-601.
    8. repec:eee:jfinec:v:128:y:2018:i:2:p:320-343 is not listed on IDEAS
    9. repec:eee:jfinec:v:125:y:2017:i:1:p:48-71 is not listed on IDEAS
    10. Stanimir Morfov & Manuel Santos, 2017. "A Model of Managerial Talent: Addressing Some Puzzles in CEO Compensation," Working Papers 2017-03, University of Miami, Department of Economics.
    11. repec:eee:jfinec:v:128:y:2018:i:2:p:378-401 is not listed on IDEAS
    12. repec:hrv:faseco:34651704 is not listed on IDEAS
    13. Chaigneau, Pierre & Sahuguet, Nicolas, 2013. "The effect of monitoring on CEO pay practices in a matching equilibrium," LSE Research Online Documents on Economics 55405, London School of Economics and Political Science, LSE Library.
    14. repec:eee:jfinec:v:132:y:2019:i:1:p:76-102 is not listed on IDEAS
    15. Balasubramanian, Bala N. & Barua, Samir K. & Karthik, D., 2015. "Influence of Board Diversity and Characteristics on CEO Compensation: Contingent Effects of Concentrated Ownership," IIMA Working Papers WP2015-03-37, Indian Institute of Management Ahmedabad, Research and Publication Department.

    More about this item

    Keywords

    CEO; Compensation; Learning; Dynamics; Bargaining; SMM;

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J41 - Labor and Demographic Economics - - Particular Labor Markets - - - Labor Contracts

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