The Boundary Conditions of Optimal Contracting and Managerial Entrenchment: A Simultaneous Two-Equation Vector Autoregression with Exogenous Variables Approach for Chief Executive Officer Compensation and Firm Performance

Juehui Shi and Ngoc Cindy Pham
Additional contact information
Juehui Shi: Angelo State University Norris-Vincent College of Business
Ngoc Cindy Pham: Brooklyn College, C.U.N.Y Murray Koppelman School of Business

American Business Review, 2024, vol. 27, issue 1, 182-206

Abstract: We apply the vector autoregression with exogenous variables (VARX) approach to integrate the optimal contracting theory, the managerial entrenchment theory, the principal-agent theory, the contextual criteria theory, and the upper echelon theory. Based on this new approach, we discover two middle ground conditions between the boundary of managerial entrenchment and optimal contracting, where CEO non-entrenchment or entrenchment cannot be explained by the managerial entrenchment theory or optimal contracting theory alone. For example, some CEOs are not entrenched when the agency problem is not mitigated, while others are entrenched when the agency problem is mitigated. The results imply that merely mitigating the agency problem cannot prevent managerial entrenchment. However, not mitigating the agency problem at all leads to managerial entrenchment. We recommend the boards look at other non-financial means and social approaches (e.g., value- and culture-based trainings, performance recognition, goodwill and friendship building events, pay transparency increase, smooth flow of information among stakeholders, value-adding managerial investments, oversight committee) to minimize the impact of managerial entrenchment on both firm performance and CEO compensation. In addition, we recommend the boards take on the approaches unique to their own firms and their CEOs to address managerial entrenchment.

Keywords: Firm Market Value; CEO Pay; Simultaneous Two-Equation Time Series Matrix System; Full Information Maximum Likelihood Estimation; VARX Methodology (search for similar items in EconPapers)
JEL-codes: L22 L25 M52 (search for similar items in EconPapers)
Date: 2024
References: Add references at CitEc
Citations:

Downloads: (external link)
https://digitalcommons.newhaven.edu/americanbusinessreview/vol27/iss1/6/ Full text (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:ris:ambsrv:0100

Access Statistics for this article

American Business Review is currently edited by Kamal Upadhyaya and Subroto Roy

More articles in American Business Review from Pompea College of Business, University of New Haven Contact information at EDIRC.
Bibliographic data for series maintained by Amber Montano ().