CEO compensation and firm performance: Evidence from financially constrained firms

Date
2022-10
Authors
Kweh, Qian Long
Tebourbi, Imen
Lo, Huai-Chun
Huang, Cheng-Tsu
Journal Title
Journal ISSN
Volume Title
Publisher
Elsevier Ltd
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. © 2022 Elsevier B.V.
Description
This work is not available in the CUD collection. The version of the scholarly record of this work is published in Research in International Business and Finance (2022), available online at: https://doi.org/10.1016/j.ribaf.2022.101671
Keywords
CEO compensation, Financial constraints, Firm performance, Pay-performance sensitivity
Citation
Kweh, Q. L., Tebourbi, I., Lo, H. -., & Huang, C. -. (2022). CEO compensation and firm performance: Evidence from financially constrained firms. Research in International Business and Finance, 61 doi:10.1016/j.ribaf.2022.101671
DOI