Journal
RESEARCH IN INTERNATIONAL BUSINESS AND FINANCE
Volume 61, Issue -, Pages -Publisher
ELSEVIER
DOI: 10.1016/j.ribaf.2022.101671
Keywords
Pay-performance sensitivity; Financial constraints; CEO compensation; Firm performance
Categories
Funding
- Ministry of Science and Technology of Taiwan [MOST 108-2410-H-155-005]
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Financial constraints have a negative moderating effect on the relationship between firm performance and CEO compensation, especially in terms of bonuses. Financially constrained firms tend to prioritize cost-saving and safeguarding future investment and liquidity, resulting in stricter control over the growth of CEO compensation.
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 payperformance 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.
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