Corportate Diversification and CEO Compensation: Evidence from the Moderating Effect of Stock Ownership

Wang Hwei Cheng (), Lou Yung-I (), Venezia Chiulien C. () and Buzzetto-Hollywood Nicole A. ()
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Wang Hwei Cheng: Associate Professor of University of Maryland Eastern Shore, Department of Business, Management and Accounting, Kiah Hall #1116, Princess Anne, MD 21853.
Lou Yung-I: Assistant Professor of Providence University, Department of Accounting, 200, Sec. 7, Taiwan Boulevard, Salu, Taichung 43301, Taiwan
Venezia Chiulien C.: CPA is an Associate Professor of Frostburg State University, Department of Accounting, Office: Guild 234, T:301-687-4124
Buzzetto-Hollywood Nicole A.: Full Professor of University of Maryland Eastern Shore, Department of Business, Management and Accounting, Kiah Hall #1112, Princess Anne, MD 21853.

Financial Internet Quarterly (formerly e-Finanse), 2019, vol. 15, issue 4, 83-92

Abstract: The article is an attempt to assess whether Stock Ownership moderates the relationship between corporate diversification and CEO compensation. Based on agency theory, we develop the hypothesis of whether when CEOs hold a large fraction of their firms’ outstanding stock, the CEOs are acting more as owners or shareholders than employees. This reduces the principal and agency relationship of agency theory, since CEOs are acting as owners rather than employees; thus the demand for further stock-based compensation is likely to be reduced because the interests of CEOs and shareholders are relatively aligned. For the purposes of this study, a sample of 2,448 CEO compensations across 1,622 firms from 1997 to 2002 was used to test several hypotheses. Corporate diversification was divided into two categories; international diversification and industry diversification. To test the hypotheses, multiple regression analysis was employed to examine stock ownership as a moderator variable on the relationship between international diversification and industry diversification and CEO total compensation with tenure, age, duality, and gender as control variables. The results indicate that stock ownership negatively and significantly influences the relationship between International diversification and CEO compensation. Additionally, the findings also confirm that stock ownership negatively and significantly influences the relationship between industrial diversification and CEO compensation. Our results are consistent with our hypotheses and indicate that firms with lower Stock Ownership produce larger interaction effects to increase international diversification and total compensation pay to CEOs, and firms with lower Stock Ownership, produce larger interaction effects to increase industry diversification and total compensation pay to CEOs.

Keywords: CEO Compensation; Corporate Diversification; International Diversification; Industrial Diversification; Firm Performance; Investment Opportunity; Stock Ownership (search for similar items in EconPapers)
JEL-codes: M12 M4 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:vrs:finiqu:v:15:y:2019:i:4:p:83-92:n:8

DOI: 10.2478/fiqf-2019-0030

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