Market Competition, Downward-Sticky Pay, and Stock Returns: Lessons from South Korea

Jungho Cho, Daecheon Yang (), Kyeongmin Baek and Yeju Bu
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Jungho Cho: Department of Accounting, Graduate School, Chung-Ang University, Seoul 06974, Republic of Korea
Daecheon Yang: School of Business Administration, Chung-Ang University, Seoul 06974, Republic of Korea
Kyeongmin Baek: Department of Accounting, Graduate School, Chung-Ang University, Seoul 06974, Republic of Korea
Yeju Bu: Department of Accounting, Graduate School, Chung-Ang University, Seoul 06974, Republic of Korea

JRFM, 2025, vol. 18, issue 5, 1-19

Abstract: This study examines whether market competition reduces managerial slack under downward-sticky CEO pay schemes, thus mitigating the potentially negative link between downward-sticky pay and shareholder’s value. Using data on the Korean product market, which has been dominated by business conglomerates known as ‘chaebols’, we first find that downward-sticky pay is prevalent in underperforming firms and affects shareholder value negatively. Then, we find that a higher level of market competition alleviates the value-deteriorating effect of downward-sticky pay. Overall, the findings from our study imply that market competition as an external mechanism of corporate governance threatens still highly paid CEOs with worsening performance and motivates them implicitly to work harder. Together with a need for shareholders’ influence on downward-sticky pay, this study sheds light on the importance of market competition regimes in developing countries where legal protection for shareholders and internal governance structures are weak.

Keywords: market competition; external governance; managerial slack; pay without performance; downward-sticky pay; shareholder value (search for similar items in EconPapers)
JEL-codes: C E F2 F3 G (search for similar items in EconPapers)
Date: 2025
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