Organization capital and executive performance incentives

Mingze Gao, Henry Leung and Buhui Qiu ()

Journal of Banking & Finance, 2021, vol. 123, issue C

Abstract: We conjecture that a firm's organization capital (OC) has a substitution effect on its executive pay-for-performance sensitivity (PPS) and empirically document a robust and significant substitution effect of OC on executive PPS. We use state-level unemployment insurance benefits as an instrumental variable for OC and show that the documented OC-PPS substitution effect is likely causal. Results are also robust to a stacked difference-in-differences estimation approach based on a quasi-natural experiment of exogenous CEO turnovers due to health-related issues. Our findings strongly suggest that greater OC substitutes for costly executive incentive compensation to sustain firm productivity and increase shareholder wealth.

Keywords: Organization capital; Executive pay-for-performance sensitivity (search for similar items in EconPapers)
JEL-codes: G34 J33 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (20)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:123:y:2021:i:c:s0378426620302788

DOI: 10.1016/j.jbankfin.2020.106017

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