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Foundation-controlled firms and CEO compensation11This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors

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  • Nguyen, Van Diem
  • Moursli, M. Reda

Abstract

We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants. Lastly, there is no conclusive evidence of differences in the levels of cash compensation. Our findings support the view that incentive contracts can substitute for large shareholder monitoring.

Suggested Citation

  • Nguyen, Van Diem & Moursli, M. Reda, 2024. "Foundation-controlled firms and CEO compensation11This research did not receive any specific grant from funding agencies in the public, commercial, or not-for-profit sectors," International Review of Financial Analysis, Elsevier, vol. 95(PB).
    • Handle: RePEc:eee:finana:v:95:y:2024:i:pb:s1057521924003491
    DOI: 10.1016/j.irfa.2024.103417
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    More about this item

    Keywords

    Foundation; Executive compensation; Family firms; Monitoring;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill
    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance

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