Incentive contracting when boards have related industry expertise

Vikram Nanda, Bunyamin Önal

Research output: Contribution to journalArticleScientificpeer-review

3 Citations (Scopus)

Abstract

We posit that presence of informed directors, by enhancing the board's information and ability to advise and monitor management, will affect the nature of incentive contracts offered to CEOs. In particular, we study the effect of directors from related industries (DRIs) i.e., downstream or upstream industries: our premise is that DRIs contribute information about product-market prospects. Using a simple optimal-contracting model to develop testable predictions, we hypothesize that DRIs reduce a firm's reliance on stock-based incentives. Our empirical evidence is strongly supportive: CEO pay and replacements are less sensitive to stock performance, particularly when industry-related information is crucial and when stock price is less informative.

Original languageEnglish
Pages (from-to)1-22
Number of pages22
JournalJOURNAL OF CORPORATE FINANCE
Volume41
DOIs
Publication statusPublished - 1 Dec 2016
MoE publication typeA1 Journal article-refereed

Keywords

  • Boards
  • CEO compensation
  • CEO turnovers
  • Pay for industry performance
  • Pay-performance sensitivity
  • Related industries

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