Kauppakorkeakoulu | Laskentatoimen laitos | Laskentatoimi | 2016
Tutkielman numero: 14374
How does information asymmetry affect CEO compensation? - Evidence from US public firms
|How does information asymmetry affect CEO compensation? - Evidence from US public firms
|2016 Kieli: eng
|laskentatoimi; accounting; johtaminen; management; johtajat; managers; palkka; pay; agentit; agents; tieto; knowledge
|agency theory; asymmetric information; CEO compensation; performance
This thesis aims to examine the relationship between firm performance, information asymmetry and CEO compensation. Prior academic research has not agreed on whether there exists a relationship between CEO pay and performance. Moreover, previous studies have not reached a consensus on the determinants of CEO compensation. Thus, this study contributes to the existing literature by examining the relationship between CEO pay and performance, and the effect that information asymmetry has on CEO pay and the pay for performance relationship. CEO compensation consists of several components. In this thesis, the relationship between firm performance and CEO pay, and the relationship between asymmetric information and CEO pay are investigated using different components of compensation in accordance with each research hypothesis.
This research is conducted as a quantitative regression analysis. The research data consists of 11 539 firm-year observations of publicly listed US companies from the years 1993-2004. Pay for performance relationship is investigated by examining the effect of firm profitability on CEO total compensation. The effect of information asymmetry on CEO compensation is assessed by examining the relationship between a proxy variable for asymmetric information and the fixed salary component of CEO compensation. The effect of information asymmetry on pay for performance relationship is assessed by examining the relationship between CEO total compensation and an interaction variable consisting of the proxy variable for asymmetric information and the performance measure. Throughout the study I use accounting return on assets (ROA) as a measure of performance.
The results give support to all three research hypotheses. I find that firm performance is positively related to CEO compensation. Further, my research results indicate that information asymmetry has a negative effect on both CEO total compensation and its salary component. Moreover, my findings also show that information asymmetry weakens the pay for performance relationship.
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