Abstract
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.
| Original language | English |
|---|---|
| Article number | 105787 |
| Journal | Journal of Banking and Finance |
| Volume | 114 |
| DOIs | |
| State | Published - May 2020 |
Bibliographical note
Funding Information:We thank Geert Bekaert (editor), three anonymous reviewers, Rui Albuquerque, Yakov Amihud, Eli Amir, Ayala Arad, Bernie Black, Ties de Kok, Peter Easton, Eli Elal, Tomer Blumkin, Brian Cadman, Shai Danziger, Olubunmi Faleye, Fabrizio Ferri, Koresh Galil, Stuart Gillan (discussant), Jon Glover, Zohar Goshen, Yaniv Grinstein, Trevor Harris, Brad Hendricks, Martin Jacob, Itai Kama, Saggi Katz, Elli Kraizberg, Alina Lerman, Shai Levi, Ariel Levy, Kai Li, Nan Li, Suresh Nallaready, Ernst Maug, Alon Raviv, Ethan Rouen, Amir Rubin, Ik?heimo Seppo (discussant), Christoph Sextroh (discussant), Jack Stecher, Dan Weiss, Avi Wohl, Yishay Yafeh and Moshe Zviran, as well as seminar participants at Bar Ilan University, Ben Gurion University, Columbia University, the Herbrew University of Jerusalem, The Hong Kong Polytechnic University, Humboldt University of Berlin, Tilburg University, WHU, the 28th Conference on Financial Economics and Accounting, the 11th Tel Aviv Conference in Accounting, FIRS 2018, the Securities and Exchange Commission, the 2018 AAA FARS midyear meeting and the 42nd Annual Congress of the European Accounting Association (EAA) for helpful comments and suggestions. We thank the Raymond Ackerman Family Chair in Israeli Corporate Governance and the The Henry Crown Institute of Business Research in Israel for financial support.
Publisher Copyright:
© 2020
Keywords
- Executive compensation
- Governance
- Optimal contracts