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Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?

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  • Hyungseok Kim
  • Woochan Kim

Abstract

This study examines how executive compensation is set when a firm is a business group member. Using Korea's unique setting of family‐controlled business groups, we find that a member firm's executive cash compensation is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link is consistent with the hypothesis that corporate managers are rewarded for their decision to benefit the controlling family at the expense of the firm they manage. Specifically, we find that the sensitivity of executive pay to other member firms’ performance exists only in respect to firms in which the cash flow rights of the controlling family exceed those of the subject firm. We also find that this sensitivity is strengthened if the controlling family's control–ownership disparity in the subject firm is above the sample median.

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  • Hyungseok Kim & Woochan Kim, 2020. "Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?," Journal of Business Finance & Accounting, Wiley Blackwell, vol. 47(9-10), pages 1268-1289, October.
    • Handle: RePEc:bla:jbfnac:v:47:y:2020:i:9-10:p:1268-1289
    DOI: 10.1111/jbfa.12453
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    Cited by:

    1. Miaowei Peng & Xue Tan, 2023. "Does controlling persons’ foreign residency rights influence executive compensation?," Review of Managerial Science, Springer, vol. 17(7), pages 2375-2416, October.

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