The Impact of CEO’s Social Network on Shareholders: Evidence from Compensation Contract

• In Event: Doctoral Student Faculty Interchange I

Abstract

1
The Impact of CEO’s Social Connections on Shareholders: Evidence from CEO’s Abnormal Return from Compensation
ABSTRACT
I investigate how CEO’s social connections systematically affect the financial incentive alignment between CEO and shareholder. The existing CEO compensation literature provides a mix of empirical evidence to support either the “rent extraction view” or “shareholder value view.” In this study, I test these two classic theories in the context of CEO social connections and predict that CEO’s social connections is associated with CEO abnormal return from compensation. I find strong support for the rent extraction view where I find a positive association between CEO social connections and CEO abnormal return. I further examine the how corporate governance mechanism interacts with the CEO social connections and CEO abnormal return. I find that a well-connected and powerful CEO can earn higher abnormal compensation from the corporation and independent director can help to restrict this abnormal return. However, I also show that when a well-connected CEO has external connections with compensation committee members, the well-connected CEO earns a higher abnormal return. Finally, I further show that a well-connected CEO who earns a abnormally high compensation has a negative impact on future firm performance. Overall, the results of my study are consistent with the agency theory and rent extraction view that well-connected CEO uses the power gain from social network to extract personal benefits at the expense of shareholders. My results are robust to alternative model specifications, and tests for endogeneity.

Author

• Zhijian He, Florida Atlantic University - Boca