TY - JOUR
T1 - Do executive compensation contracts maximize firm value? Indications from a quasi-natural experiment
AU - Abudy, Menachem (Meni)
AU - Amiram, Dan
AU - Rozenbaum, Oded
AU - Shust, Efrat
N1 - Publisher Copyright:
© 2020
PY - 2020/5
Y1 - 2020/5
N2 - We find significant positive abnormal returns surrounding a surprising and quick enactment of a law that restricts executive pay to a binding upper limit in a few industries. We find that the effect is concentrated only for firms in which the restriction is binding. We also find that the increase in value is greater for firms with weaker corporate governance and smaller for firms that grant a greater portion of equity-based compensation to their executives. These results provide indications that, on average, compensation contracts can be set in a way that does not maximize firm value.
AB - We find significant positive abnormal returns surrounding a surprising and quick enactment of a law that restricts executive pay to a binding upper limit in a few industries. We find that the effect is concentrated only for firms in which the restriction is binding. We also find that the increase in value is greater for firms with weaker corporate governance and smaller for firms that grant a greater portion of equity-based compensation to their executives. These results provide indications that, on average, compensation contracts can be set in a way that does not maximize firm value.
KW - Executive compensation
KW - Governance
KW - Optimal contracts
UR - http://www.scopus.com/inward/record.url?scp=85081259151&partnerID=8YFLogxK
U2 - 10.1016/j.jbankfin.2020.105787
DO - 10.1016/j.jbankfin.2020.105787
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AN - SCOPUS:85081259151
SN - 0378-4266
VL - 114
JO - Journal of Banking and Finance
JF - Journal of Banking and Finance
M1 - 105787
ER -