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Executive Pay and Market Value Sensitivity

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  • Feng-Li Lin

Abstract

Executive pay relative to that of average workers has risen dramatically worldwide. Such a high level of executive pay raises the question of whether a steep rise in executive pay affects firm value. This study examined the relationship between executive pay and firm value. A panel smooth transition regression model is adopted to determine an optimal level of executive pay that maximizes firm value for a sample of 512 Taiwanese-listed firms over the period 2006-2011. The finding is that when the ratio of executive pay to net income after tax exceeds 2.71%, the firm value increases. The results suggest a correlation between large executive ownership (corresponding to high executive pay) and both increased operational efficiencies and firm value. These findings may be useful when contemplating executive compensation policy. Key words: Executive ownership, Firm value, Executive pay, Optimal level.JEL: G30, G32, G35, G38.

Suggested Citation

  • Feng-Li Lin, 2016. "Executive Pay and Market Value Sensitivity," Panoeconomicus, Savez ekonomista Vojvodine, Novi Sad, Serbia, vol. 63(4), pages 411-424.
    • Handle: RePEc:voj:journl:v:63:y:2016:i:4:p:411-424:id:33
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    More about this item

    Keywords

    Executive ownership; Firm value; Executive pay; Optimal level;
    All these keywords.

    JEL classification:

    • G30 - Financial Economics - - Corporate Finance and Governance - - - General
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G35 - Financial Economics - - Corporate Finance and Governance - - - Payout Policy
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation

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