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Idiosyncratic volatility, executive compensation and corporate governance: examination of the direct and moderate effects

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  • Mu-Shun Wang

Abstract

Entrenchment of private benefits by the CEO or dominant owners can lead corporations to avoid riskier but more private benefits resulting in greater idiosyncratic volatility and information flow trading. Using a unique database of 806 listed firms, we investigate the impact of CEO compensation and corporate governance on idiosyncratic volatility and information flow trading. We find strong and robust evidence that equity-based (fixed income) CEO compensation is negatively (positively) related to volatility and information trading. Incorporating an agent principal–principal perspective into our models of managerial discretion provides us with an accurate prediction of how the proportion of CEO compensation and the degree of entrenchment will influence risk-taking decisions as well as how equity-based compensation interacts with related-party transaction and ownership dispersion to influence stock volatility. Finally, we find that idiosyncratic volatility and information flow trading are also affected by CEO compensation and corporate governance, which act as instrumental variables, while subject to environmental variants and the jointly determined. Copyright Springer-Verlag Berlin Heidelberg 2016

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  • Mu-Shun Wang, 2016. "Idiosyncratic volatility, executive compensation and corporate governance: examination of the direct and moderate effects," Review of Managerial Science, Springer, vol. 10(2), pages 213-244, March.
    • Handle: RePEc:spr:rvmgts:v:10:y:2016:i:2:p:213-244
    DOI: 10.1007/s11846-014-0143-7
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    Cited by:

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    More about this item

    Keywords

    Idiosyncratic volatility; Panel data; CEO compensation; Corporate governance index; Agent principal–principal model; G11; G12; G18; G32;
    All these keywords.

    JEL classification:

    • G11 - Financial Economics - - General Financial Markets - - - Portfolio Choice; Investment Decisions
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • G32 - Financial Economics - - Corporate Finance and Governance - - - Financing Policy; Financial Risk and Risk Management; Capital and Ownership Structure; Value of Firms; Goodwill

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