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Does social capital mitigate agency problems? Evidence from Chief Executive Officer (CEO) compensation

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  • Hoi, Chun Keung(Stan)
  • Wu, Qiang
  • Zhang, Hao

Abstract

We find that social capital, as captured by secular norms and social networks surrounding corporate headquarters, is negatively associated with levels of CEO compensation. This relation holds in a range of robustness tests including those that address omitted variable bias and reverse causality. Additionally, social capital reduces the likelihood that firms make opportunistic option grant awards that unduly favor CEOs, including lucky awards, backdated awards, and unscheduled awards. Social capital also lessens the accretive effect of CEO power on CEO compensation. These findings indicate that social capital mitigates agency problems by restraining managerial rent extraction in CEO compensation.

Suggested Citation

  • Hoi, Chun Keung(Stan) & Wu, Qiang & Zhang, Hao, 2019. "Does social capital mitigate agency problems? Evidence from Chief Executive Officer (CEO) compensation," Journal of Financial Economics, Elsevier, vol. 133(2), pages 498-519.
  • Handle: RePEc:eee:jfinec:v:133:y:2019:i:2:p:498-519
    DOI: 10.1016/j.jfineco.2019.02.009
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    More about this item

    Keywords

    Executive compensation; Opportunistic timing; Backdating; Social capital; Social norms;
    All these keywords.

    JEL classification:

    • D23 - Microeconomics - - Production and Organizations - - - Organizational Behavior; Transaction Costs; Property Rights
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • J44 - Labor and Demographic Economics - - Particular Labor Markets - - - Professional Labor Markets and Occupations
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • Z13 - Other Special Topics - - Cultural Economics - - - Economic Sociology; Economic Anthropology; Language; Social and Economic Stratification

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