Executive Compensation, Corporate Governance and Corporate Performance: A Simultaneous Equation Approach
Ntim. C.G. (2015). Executive Compensation, Corporate Governance and Corporate Performance: A Simultaneous Equation Approach. Managerial and Decision Economics, Vol. 36, No. 2, pp.67-96.
49 Pages Posted: 3 Oct 2013 Last revised: 11 May 2015
Date Written: May 11, 2015
This paper investigates the association between executive compensation and performance. It uniquely utilizes a comprehensive set of corporate governance mechanisms within a three-stage least squares (3SLS) simultaneous equation framework. Results based on estimating a conventional single equation model indicate that the executive pay and performance sensitivity is relatively weak, whereas those based on estimating a 3SLS model generally suggest improved executive pay and performance sensitivity. Our findings highlight the need for future research to control for possible simultaneous interdependencies when estimating the executive pay and performance link. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, executive pay and performance proxies.
Keywords: Executive compensation, Corporate performance, Corporate governance, Simultaneous equation, Generalized method of moments (GMM), Endogeneity
JEL Classification: G32, G34, G38
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