Executive pay disparity and the cost of equity capital

Zhihong Chen, Yuan Huang, Kuo-chiang Wei

Research output: Journal article publicationJournal articleAcademic researchpeer-review

43 Citations (Scopus)

Abstract

Executive pay disparity, as measured by chief executive officer (CEO) pay slice (CPS), is positively associated with the implied cost of equity, even after controlling for other determinants of the cost of equity. The difference in the cost of equity can explain 43%of the difference in the valuation effect attributable to CPS reported by Bebchuk, Cremers, and Peyer (2011). Further analysis shows that the positive association is stronger when agency problems of free cash flow are more severe and when CEO succession planning is more important. Our evidence suggests that a large CPS is associated with CEO entrenchment and high succession risk.
Original languageEnglish
Pages (from-to)849-885
Number of pages37
JournalJournal of Financial and Quantitative Analysis
Volume48
Issue number3
DOIs
Publication statusPublished - Jun 2013

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics

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