CEO compensation and firm performance: Evidence from financially constrained firms

Qian Long Kweh, Imen Tebourbi, Huai-Chun Lo and Cheng-Tsu Huang

Research in International Business and Finance, 2022, vol. 61, issue C

Abstract: We examine how financial constraints affect the relationship between firm performance and the CEO compensation of U.S. listed corporations during the period 1996–2018. Our results indicate that financial constraints negatively moderate the positive relationships between firm performance and CEO compensation. That is, financially constrained firms that perform well financially will increase their CEO compensation at a smaller rate than their counterparts because financially constrained firms tend to hoard cash to save cost and safeguard for future investment, liquidity and leverage policies. However, the negative impact of financial constraints on the positive pay-performance sensitivity is more pronounced in the bonus sample. That is, financially constrained firms control bonus increments to control costs even when their firm performance improves. Overall, our results, which are robust to a battery of tests, explain why prior studies show minimal pay-performance sensitivity and the need to account for the financial constraints of a company in designing CEO compensation.

Keywords: Pay-performance sensitivity; Financial constraints; CEO compensation; Firm performance (search for similar items in EconPapers)
JEL-codes: G30 J33 L25 M12 (search for similar items in EconPapers)
Date: 2022
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:riibaf:v:61:y:2022:i:c:s0275531922000599

DOI: 10.1016/j.ribaf.2022.101671

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