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CEO compensation and firm performance: Evidence from financially constrained firms

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  • Kweh, Qian Long
  • Tebourbi, Imen
  • Lo, Huai-Chun
  • Huang, Cheng-Tsu

Abstract

We examine how financial constraints affect the relationship between firm performance and the CEO compensation of U.S. listed corporations during the period 1996–2018. Our results indicate that financial constraints negatively moderate the positive relationships between firm performance and CEO compensation. That is, financially constrained firms that perform well financially will increase their CEO compensation at a smaller rate than their counterparts because financially constrained firms tend to hoard cash to save cost and safeguard for future investment, liquidity and leverage policies. However, the negative impact of financial constraints on the positive pay-performance sensitivity is more pronounced in the bonus sample. That is, financially constrained firms control bonus increments to control costs even when their firm performance improves. Overall, our results, which are robust to a battery of tests, explain why prior studies show minimal pay-performance sensitivity and the need to account for the financial constraints of a company in designing CEO compensation.

Suggested Citation

  • Kweh, Qian Long & Tebourbi, Imen & Lo, Huai-Chun & Huang, Cheng-Tsu, 2022. "CEO compensation and firm performance: Evidence from financially constrained firms," Research in International Business and Finance, Elsevier, vol. 61(C).
    • Handle: RePEc:eee:riibaf:v:61:y:2022:i:c:s0275531922000599
    DOI: 10.1016/j.ribaf.2022.101671
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    More about this item

    Keywords

    Pay-performance sensitivity; Financial constraints; CEO compensation; Firm performance;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • L25 - Industrial Organization - - Firm Objectives, Organization, and Behavior - - - Firm Performance
    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

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