Do executive compensation contracts maximize firm value? Indications from a quasi-natural experiment

Menachem Abudy, Dan Amiram, Oded Rozenbaum and Efrat Shust

Journal of Banking & Finance, 2020, vol. 114, issue C

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.

Keywords: Executive compensation; Governance; Optimal contracts (search for similar items in EconPapers)
JEL-codes: G30 G38 M12 M48 M52 (search for similar items in EconPapers)
Date: 2020
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:114:y:2020:i:c:s0378426620300558

DOI: 10.1016/j.jbankfin.2020.105787

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