Publication Type
Journal Article
Version
submittedVersion
Publication Date
10-2013
Abstract
We integrate an agency problem into search theory to study executive compensation in a market equilibrium. A CEO can choose to stay or quit and search after privately observing an idiosyncratic shock to the firm. The market equilibrium endogenizes CEOs’ and firms’ outside options and captures contracting externalities. We show that the optimal pay-to-performance ratio is less than one even when the CEO is risk neutral. Moreover, the equilibrium pay-to-performance sensitivity depends positively on a firm's idiosyncratic risk and negatively on the systematic risk. Our empirical tests using executive compensation data confirm these results.
Keywords
executive compensation, agency problem, chief executive officers, market equilibrium
Discipline
Corporate Finance | Human Resources Management
Research Areas
Finance
Publication
Journal of Finance
Volume
68
Issue
5
First Page
2001
Last Page
2058
ISSN
1540-6261
Identifier
10.1111/jofi.12069
Publisher
Wiley
Citation
CAO, Melanie and WANG, Rong.
Optimal CEO Compensation with Search: Theory and Empirical Evidence. (2013). Journal of Finance. 68, (5), 2001-2058.
Available at: https://ink.library.smu.edu.sg/lkcsb_research/3238
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1111/jofi.12069