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CEO-Firm Match and Principal-Agent Problem

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  • Li, Fei
  • Ueda, Masako

Abstract

We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.

Suggested Citation

  • Li, Fei & Ueda, Masako, 2005. "CEO-Firm Match and Principal-Agent Problem," CEPR Discussion Papers 5119, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:5119
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    References listed on IDEAS

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    Cited by:

    1. Kaniska Dam, 2007. "A Two-Sided Matching Model of Monitored Finance," Working papers DTE 383, CIDE, División de Economía.
    2. Grund, Christian & Sliwka, Dirk, 2006. "Performance Pay and Risk Aversion," Discussion Paper Series of SFB/TR 15 Governance and the Efficiency of Economic Systems 101, Free University of Berlin, Humboldt University of Berlin, University of Bonn, University of Mannheim, University of Munich.

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    Keywords

    Principal-Agent problem; sorting;

    JEL classification:

    • G39 - Financial Economics - - Corporate Finance and Governance - - - Other

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