Identifying the effect of managerial control on firm performance

Using a unique sample, we attempt to identify the consequence of the separation between inside ownership and control for firm performance. We exploit the fact that banking institutions may hold their own shares in trust to construct a clean measure of the wedge between inside voting control and cash flow rights. These shares provide managers with no monetary incentives, since their dividends accrue to trust beneficiaries. However, managers may have the authority to vote these shares. Contrary to the belief that managerial control is purely detrimental, we find that it has positive effects on performance over at least some range.     

The impact of board capital and board characteristics on firm performance

The purpose of this study is to investigate the effects of board capital on the relationship between CEO duality, board dependence, managerial share ownership and performance. We argue that board capital (the ability of board members to perform manager-monitoring activities and to provide advice and counsel to management) varies across board members. Highly qualified board members will be better at monitoring management and constitute a more valuable resource for firms. Based on a sample of U.S. companies listed in the Compustat S&P 500 and using both resource dependence and agency theories, we predict and find that CEO duality and board dependence negatively affect performance and that board capital mitigates the negative effects. We also predict and find that managerial share ownership positively affects performance and that board capital strengthens this positive relationship. The results are consistent with the view that firms benefit from board capital in terms of outside directors' ability to monitor managers and provide advice and counsel to managers.     

Reexamining the managerial ownership effect on firm value

Whether equity-based compensation and equity ownership align the interests of managers with stockholders is an important question in finance. Early studies found an inverted U-shaped relation between managerial ownership and firm value, but later studies using firm fixed effects found no relation. Managerial ownership levels change very slowly over time which may mask an ownership effect on firm value when using a fixed effect model. This is due to a much smaller within firm variation than between firm variation. We demonstrate that using pay-performance semi-elasticity, rather than pay-performance sensitivity as a measure of managerial ownership incentives, results in meaningful variation within firm over time. The greater within firm variation increases the power to detect a relation between managerial ownership and firm value with fixed effect regressions. As in the early research on this issue, we find a significant inverted U-shaped relation between managerial ownership and Tobin's Q in fixed effects regressions and after controlling for endogeneity with both two-stage and three-stage least squares regressions. Our results are consistent with incentive alignment at low levels and risk aversion at high levels of managerial ownership.     

Auditor independence, executive pay and firm performance

This paper investigates whether compensation committees actively intervene to adjust accounting performance‐based incentive schemes for the real, or perceived, reduced earnings credibility signalled by the purchase of non‐audit services. Using a nonlinear, two‐stage least‐squares method that accounts for the simultaneity of executive pay, firm performance and non‐audit fees, we find a significant negative relationship between non‐audit fees and the sensitivity of chief executive officer (CEO) pay to firm performance. Point estimates suggest that the reduced weight applied to accounting performance lowers the incentive component of executive pay between roughly 5 and 8 per cent for the CEO of the ‘average firm’.     

Executive pay and firm performance in the Philippines

This paper provides the first systematic evidence on the nature of the relation between executive compensation and firm performance in the Philippines. Comparable to studies of Japan, Korea, and China, we find a positive relation between executive compensation and performance in the Philippines for those firms not affiliated to a corporate group, but that this relation does not hold for affiliated firms. We conclude that the substantial portion of the Philippine economy that is under the control of group networks incentivize managers in ways other than through use of pay–performance schemes.     

Excessive managerial entrenchment,corporate governance,and firm performance

This paper investigates the differential impact of positive and negative excessive managerial entrenchment on the CEO turnover-performance sensitivity, CEO compensation, and firm performance. We measure the degree of managerial entrenchment using the E-index introduced by Bebchuk et al. (2009). Our findings suggest that an increase in excess CEO entrenchment reduces the likelihood of CEO turnover due to poor performance. We also show a positive association between excessive entrenchment and CEO compensation as managers gain more power and authority when they are entrenched. On the other hand, excess CEO entrenchment has an inverse correlation with firm performance and firm value. Overall, we propose that excessive managerial entrenchment has a converse impact on board monitoring and shareholders’ welfare.     

Family ties,board compensation and firm performance

This study examines the effect of corporate boards with family ties on board compensation and firm performance. Family firms dominate the vast majority of enterprise forms around the world. Despite possible agency problems between large and small shareholders, family boards may contribute specific knowledge and competitive advantage to the firm. This paper shows that the excess board compensation of firms with a non-family CEO is positively related to the percentage of board members with family ties, but the presence of family boards cannot justify the outcome of firm performance, suggesting a negative entrenchment of firms with a non-family CEO. By contrast, the excess board compensation of firms with a family CEO is found to be unrelated to the percentage of board members with family ties, and the presence of family boards is positively associated with firm performance, suggesting the convergence-of-interests of firms with a family CEO.     

Executive pay dispersion,corporate governance,and firm performance

Much of the research on management compensation focuses on the level and structure of executives’ pay. In this study, we examine a compensation element that has not received so far considerable research attention—the dispersion of compensation across managers—and its impact on firm performance. We examine the implications of two theoretical models dealing with pay dispersion—tournament versus equity fairness. Tournament theory stipulates that a large pay dispersion provides strong incentives to highly qualified managers, leading to higher efforts and improved enterprise performance, while arguments for equity fairness suggest that greater pay dispersion increases envy and dysfunctional behavior among team members, adversely affecting performance. Consistent with tournament theory, we find that firm performance, measured by either Tobin’s Q or stock performance, is positively associated with the dispersion of management compensation. We also document that the positive association between firm performance and pay dispersion is stronger in firms with high agency costs related to managerial discretion. Furthermore, effective corporate governance, especially high board independence, strengthens the positive association between firm performance and pay dispersion. Our findings thus add to the compensation literature a potentially important dimension: managerial pay dispersion.

Empire-builders and shirkers: Investment,firm performance,and managerial incentives

We consider the equilibrium relationships between incentives from compensation, investment, and firm performance. In an optimal contracting model, we show that the relationship between firm performance and managerial incentives, in isolation, is insufficient to identify whether managers have private benefits of investment, as in theories of managerial entrenchment. We estimate the joint relationships between incentives and firm performance and between incentives and investment. We provide new results showing that investment is increasing in incentives. Further, in contrast to previous studies, we find that firm performance is increasing in incentives at all levels of incentives. Taken together, these results are inconsistent with theories of overinvestment based on managers having private benefits of investment. These results are consistent with managers having private costs of investment and, more generally, models of underinvestment.     

The evolution of pay premiums for managerial attributes

This paper proposes and estimates an interactive fixed effects model of executive compensation, which allows for time-variant pay premiums for unobserved manager attributes. We find that two managerial traits can explain executive compensation over time: talent and conservatism. The market premium for talent is higher in bull markets, as the higher marginal productivity of human capital during these periods increases the demand and thus the price for talents. Such pay premium is concentrated among top talented managers, who earn a premium about five times that of median talented managers. The pay premium for conservatism is linked to the equity market risk premium, with conservatism being discounted (compensated) during the low (high) risk premium periods. We show that risk-taking managers are rewarded during the early period of our sample. However, after the periods characterized by higher risk premium, such as the financial crisis, conservatism becomes a more desirable trait.     

The impact of board size on firm performance: evidence from the UK

We examine the impact of board size on firm performance for a large sample of 2746 UK listed firms over 1981–2002. The UK provides an interesting institutional setting, because UK boards play a weak monitoring role and therefore any negative effect of large board size is likely to reflect the malfunction of the board's advisory rather than monitoring role. We find that board size has a strong negative impact on profitability, Tobin's Q and share returns. This result is robust across econometric models that control for different types of endogeneity. We find no evidence that firm characteristics that determine board size in the UK lead to a more positive board size–firm performance relation. In contrast, we find that the negative relation is strongest for large firms, which tend to have larger boards. Overall, our evidence supports the argument that problems of poor communication and decision-making undermine the effectiveness of large boards.     

The relationship between managerial ownership and firm performance in high R&D firms

Several studies have examined the relationship between managerial ownership and firm performance/value (e.g., [Journal of Financial Economics 20 (1988) 293; Journal of Financial Economics 27 (1990) 595; Journal of Corporate Finance 5 (1999) 79]). Using different samples, these studies provide general support for the argument that increases in managerial ownership create countervailing interest alignment and entrenchment effects, leading to a nonlinear relationship between managerial ownership and firm performance. However, the actual form of this nonlinear relationship differs across the studies.The present paper examines the relationship between managerial ownership and performance for high R&D firms that are listed on the NYSE, AMEX and NASDAQ. We find that Tobin's Q initially declines with managerial ownership, then increases, then declines again and, finally, increases again—a W-shaped relationship. The findings from our study point to the importance of industry effects in the relationship between managerial ownership and firm performance.     

The performance effect of managerial ownership: Evidence from China

By examining a sample of non-listed Chinese firms, we provide the first evidence from China for the effect of managerial ownership on firm performance. In matching-sample comparisons, we find that firms of significant managerial ownership outperform firms whose managers do not own equity shares. Our further results indicate the relation between firm performance and managerial ownership is nonlinear, and the inflection point at which the relation turns negative occurs at ownership above 50%. Compared with previous studies, our results are less likely to suffer from an endogeneity problem due to the non-list nature of our sample and the unique institutional environment in China.     

The effect of comprehensive performance measurement systems on role clarity,psychological empowerment and managerial performance

This study examines how comprehensive performance measurement systems (PMS) affect managerial performance. It is proposed that the effect of comprehensive PMS on managerial performance is indirect through the mediating variables of role clarity and psychological empowerment. Data collected from a survey of 83 strategic business unit managers are used to test the model. Results from a structural model tested using Partial Least Squares regression indicate that comprehensive PMS is indirectly related to managerial performance through the intervening variables of role clarity and psychological empowerment. This result highlights the role of cognitive and motivational mechanisms in explaining the effect of management accounting systems on managerial performance. In particular, the results indicate that comprehensive PMS influences managers’ cognition and motivation, which, in turn, influence managerial performance.     

The impact of firm ownership,board monitoring on operating performance of Chinese mergers and acquisitions

In this paper, we employ board monitoring mechanisms and within-firm governance variables to investigate the operating performance of 340 mergers and acquisitions in China over the 2004–2011 period. Our results document a significant deterioration in post-acquisition operating performance of acquiring firms over 12–36 months. We find independent directors, managerial shareholding, ownership concentration have a positive and significant impact on operating performance of acquiring firms. However, the related party transactions exert a negative and significant effect on matched control adjusted ROA. Further analysis of our sub-sample indicates that privately owned enterprises are better monitors compared to the state owned enterprises.     

The effect of ownership structure on firm performance: Additional evidence

This article examines the effect of ownership structure on corporate performance, using stock returns as a measure of performance. Based on the 1988–1992 sample period, we find that the level of insider ownership is positively related to stock returns. This result suggests that as managers' equity ownership increases, their interests coincide more with those of outside shareholders. But we also find that the square of the level of insider ownership is inversely related to stock returns, indicating that excessive insider ownership rather hurts corporate performance probably due to the problem associated with managers' entrenchment. Finally, we find that stock returns are positively related to institutional ownership, indicating that institutional owners are active in monitoring management.     

The effect of board of director composition on corporate tax aggressiveness

This study considers the effect of board of director composition on corporate tax aggressiveness. Our logit regression results for a choice-based sample of 32 corporations comprising 16 tax-aggressive corporations and 16 non-tax-aggressive corporations show that the inclusion of a higher proportion of outside members on the board of directors reduces the likelihood of tax aggressiveness. The ordinary least squares regression results from our sensitivity analysis of a cross-section of 401 corporations confirm our main results about board of director composition and tax aggressiveness.     

The impact of foreign board membership on firm value

This study examines the effect of foreign (Anglo-American) board membership on corporate performance measured in terms of firm value (Tobin’s Q). Using a sample of firms with headquarters in Norway or Sweden the study indicates a significantly higher value for firms that have outsider Anglo-American board member(s), after a variety of firm-specific and corporate governance related factors have been controlled for. We argue that this superior performance reflects the fact that these companies have successfully broken away from a partly segmented domestic capital market by “importing” an Anglo-American corporate governance system. Such an “import” signals a willingness on the part of the firm to expose itself to improved corporate governance and enhances its reputation in the financial market.     

The effect of corporate culture on firm performance: Evidence from China

This study examines whether corporate culture promotion affects firm performance in China in terms of firm market value, firm financial performance and innovation output. We find consistent evidence that corporate culture promotion is negatively related to firm market value, positively related to innovation output and not significantly related to firm financial performance. In addition, the negative effect of corporate culture promotion on firm market value is driven by small firms and firms located in less developed provinces. Furthermore, we find that some specific corporate culture promotions, such as innovation culture promotion and integrity culture promotion, are not related to firm value or financial performance. However, innovation culture promotion is positively associated with innovation output.     

The effect of cost management knowledge on the relationship between budgetary participation and managerial performance

This study investigates the relationship between budget participation (BP), cost management knowledge and managerial performance. It draws on relevant previous research in the theory of work performance and accounting to formulate the research questions. Eighty-three managers from Finnish companies participated in the study. Data were collected from the managers using a mail questionnaire. The results indicate that managers’ cost management knowledge, and especially the balanced perspective of cost management knowledge, moderates the effect of BP on self-perception of managerial performance. It was specifically found that the effect of BP on perceived managerial performance becomes more positive when managers’ cost management knowledge increases. High perception of managerial performance is obtained when both the BP and managers’ cost management knowledge are high. Our results suggest that organizations should improve the cost management knowledge of managers who participate in the budgeting process.