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Heads I Win, Tails You Lose: Institutional Monitoring Of Executive Pay Rigidity

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  • Paul Moon Sub Choi
  • Chune Young Chung
  • Ji Hoon Hwang
  • Chang Liu

Abstract

Agency theory argues that pay for performance alleviates the conflict of interest between managers and shareholders. Furthermore, the literature finds that institutional monitoring tends to promote the performance–pay linkage, thus aligning the two parties’ incentives. We find that executive compensation rigidity is negatively and significantly associated with firm value. Moreover, ownership by long‐term institutional investors reduces the pay rigidity of top managers in underperforming firms, thus decreasing the value‐destroying effect of the rigidity. Overall, these results reaffirm the role of institutional monitoring in mitigating managerial rent extraction.

Suggested Citation

  • Paul Moon Sub Choi & Chune Young Chung & Ji Hoon Hwang & Chang Liu, 2019. "Heads I Win, Tails You Lose: Institutional Monitoring Of Executive Pay Rigidity," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 42(4), pages 789-816, December.
    • Handle: RePEc:bla:jfnres:v:42:y:2019:i:4:p:789-816
    DOI: 10.1111/jfir.12196
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    Cited by:

    1. Daeheon Choi & Chune Young Chung & Mira Yoon & Jason Young, 2020. "Factors in a Sustainable Labor Market: Evidence from New College Graduates’ Initial Job Placement in Korea," Sustainability, MDPI, vol. 12(6), pages 1-22, March.
    2. Chune Young Chung & Euisup Lee & Chang-Gyun Park, 2020. "Do Ownership Ties Increase the Optimistic Bias of Analysts’ Earnings Estimates? Evidence from Corporate Financing in the Korean Market," Sustainability, MDPI, vol. 12(11), pages 1-20, June.
    3. Choi, Paul Moon Sub & Choi, Joung Hwa & Chung, Chune Young, 2020. "Do individual traders undermine firm valuation?," Finance Research Letters, Elsevier, vol. 36(C).
    4. Daeheon Choi & Paul Moon Sub Choi & Joung Hwa Choi & Chune Young Chung, 2020. "Corporate Governance and Corporate Social Responsibility: Evidence from the Role of the Largest Institutional Blockholders in the Korean Market," Sustainability, MDPI, vol. 12(4), pages 1-15, February.

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