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HEADS I WIN, TAILS YOU LOSE: INSTITUTIONAL MONITORING OF EXECUTIVE PAY RIGIDITY
- HEADS I WIN, TAILS YOU LOSE: INSTITUTIONAL MONITORING OF EXECUTIVE PAY RIGIDITY
- Choi, Paul Moon Sub; Chung, Chune Young; Hwang, Ji Hoon; Liu, Chang
- Ewha Authors
- SCOPUS Author ID
- Issue Date
- Journal Title
- JOURNAL OF FINANCIAL RESEARCH
- JOURNAL OF FINANCIAL RESEARCH vol. 42, no. 4, pp. 789 - 816
- SSCI; SCOPUS
- Document Type
- Agency theory argues that pay for performance alleviates the conflict of interest between managers and shareholders. Furthermore, the literature finds that institutional monitoring tends to promote the performance-pay linkage, thus aligning the two parties' incentives. We find that executive compensation rigidity is negatively and significantly associated with firm value. Moreover, ownership by long-term institutional investors reduces the pay rigidity of top managers in underperforming firms, thus decreasing the value-destroying effect of the rigidity. Overall, these results reaffirm the role of institutional monitoring in mitigating managerial rent extraction.
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