ORIGINAL ARTICLE
Independent director compensation, corruption, and monitoring
Natasha Burns,
Anna Kapalczynski,
John K. Wald,
Natasha Burns
Department of Finance, University of Texas at San Antonio, San Antonio, Texas, USA
Search for more papers by this authorAnna Kapalczynski
School of Business and Leadership, University of Puget Sound, Tacoma, Washington, USA
Search for more papers by this authorCorresponding Author
John K. Wald
Department of Finance, University of Texas at San Antonio, San Antonio, Texas, USA
Correspondence
John K. Wald, Department of Finance, UTSA, One UTSA Circle, San Antonio, TX 78249, USA.
Email: john.wald@utsa.edu
Search for more papers by this authorNatasha Burns,
Anna Kapalczynski,
John K. Wald,
Natasha Burns
Department of Finance, University of Texas at San Antonio, San Antonio, Texas, USA
Search for more papers by this authorAnna Kapalczynski
School of Business and Leadership, University of Puget Sound, Tacoma, Washington, USA
Search for more papers by this authorCorresponding Author
John K. Wald
Department of Finance, University of Texas at San Antonio, San Antonio, Texas, USA
Correspondence
John K. Wald, Department of Finance, UTSA, One UTSA Circle, San Antonio, TX 78249, USA.
Email: john.wald@utsa.edu
Search for more papers by this authorAbstract
We find that independent directors in more corrupt countries receive greater pay. This relation could reflect outside directors in corrupt countries expropriating firm value, or it could reflect higher compensation for the additional effort required to lessen the negative effects of corruption. Acquirer acquisition announcement returns are lower in more corrupt countries, and this relation is mitigated by higher director pay. Higher director pay is also associated with greater sensitivity of CEO turnover to firm performance and moderates the negative effects of country-level corruption on firm value. This evidence is consistent with higher director pay in corrupt countries incentivizing effort.
REFERENCES
- Adams, R. (2017). Boards, and the directors who sit on them. In B. Hermalin & M. Weisbach (Eds.), The handbook of the economics of corporate governance. North Holland, The Netherlands: Elsevier.
- Aguir, I., Burns, N., Mansi, S. A., & Wald, J. K. (2014). Liability protection, director compensation, and incentives. Journal of Financial Intermediation, 23, 570–589.
- Akerlof, G., & Yellen, J. (1990). The fair wage-effort hypothesis and unemployment. Quarterly Journal of Economics, 105, 255–283.
- Anderson, R., & Reeb, D. (2004). Board composition: Balancing family influence in S&P 500 firms. Administrative Science Quarterly, 49, 209–237.
- Atanasov, V., Black, B., Ciccotello, C., & Gyoshev, S. (2010). How does law affect finance? An examination of equity tunneling in Bulgaria. Journal of Financial Economics, 96, 155–173.
- Barth, M., Landsman, W., Lang, M., & Williams, C. (2012). Are IFRS-based and US GAAP-based accounting amounts comparable? Journal of Accounting and Economics, 54, 68–93.
- Bebchuk, L., & Fried, J. (2003). Executive compensation as an agency problem. Journal of Economic Perspectives, 17, 71–92.
- Becker, G., & Stigler, G. (1974). Law enforcement, malfeasance, and compensation of enforcers. Journal of Legal Studies, 3, 1–18.
- Bhagat, S., & Bolton, B. (2008). Corporate governance and firm performance. Journal of Corporate Finance, 14, 257–273.
- Black, D. (1948). On the rationale of group decision-making. Journal of Political Economy, 56, 23–34.
- Boubakri, N., Guedhami, O., Mishra, D., & Saffar, W. (2012). Political connections and the cost of equity capital. Journal of Corporate Finance, 18, 541–559.
- Brick, I., Palmon, O., & Wald, J. (2006). CEO compensation, director compensation, and firm performance: Evidence of cronyism? Journal of Corporate Finance, 12, 403–423.
- Bris, A., & Cabolis, C. (2008). The value of investor protection: Firm evidence from cross-border mergers. Review of Financial Studies, 21, 605–648.
- Bryan, S. H., Huang, L., Klein, A., & Lilien, S. B. (2000). Compensation of outside directors: An empirical analysis of economic determinants, NYU Working Paper. Retrieved from https://papers.ssrn.com/sol3/papers.cfm?abstract_id=244540
- Burns, N., Minnick, K., & Starks, L. (2017). CEO Tournaments: A cross-country analysis of causes, cultural influences and consequences. Journal of Financial and Quantitative Analysis, 52, 519–551.
- Bushman, R., Piotroski, J., & Smith, A. (2004). What determines corporate transparency? Journal of Accounting Research, 42(2), 207–252.
- Cameron, A. C., & Miller, D. L. (2015). A Practitioner's guide to cluster-robust inference. Journal of Human Resources, 50, 317–372.
- Chen, X., Harford, J., & Li, K. (2007). Monitoring: Which institutions matter? Journal of Financial Economics, 86, 279–305.
- Coffee, J. (1999). The future as history: The prospects for global convergence in corporate governance and its implications. Northwestern University Law Review, 93, 641–708.
- Cohn, J., & Rajan, U. (2013). Optimal corporate governance in the presence of an activist investor. Review of Financial Studies, 26, 985–1020.
- Dass, N., Nanda, V., & Xiao, C. (2016). Public corruption in the United States: Implications for local firms. Review of Corporate Finance Studies, 5, 102–138.
- Djankov, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2008). The law and economics of self-dealing. Journal of Financial Economics, 88, 430–465.
- Doidge, C., Karolyi, G. A., & Stulz, R. (2004). Why are foreign firms listed in the US worth more? Journal of Financial Economics, 71, 205–238.
- Doidge, C., Karolyi, G. A., & Stulz, R. (2007). Why do countries matter so much for corporate governance? Journal of Financial Economics, 86, 1–39.
- Durnev, A., & Kim, E. (2005). To steal or not to steal: Firm attributes, legal environment, and valuation. Journal of Finance, 60, 1461–1493.
- Faccio, M. (2006). Politically connected firms. American Economic Review, 96, 369–386.
- Fauver, L., & Fuerst, M. E. (2006). Does good corporate governance include employee representation? Evidence from German corporate boards. Journal of Financial Economics, 82, 673–710.
- Fauver, L., Hung, M., Li, X., & Taboada, A. (2017). Board reforms and firm value: Worldwide evidence. Journal of Financial Economics, 125, 120–142.
- Fedaseyeu, V., Linck , J., & Wagner, H. (2018). Do qualifications matter? New evidence on board functions and director compensation. Journal of Corporate Finance, 48, 816–839.
- Fee, C., Hadlock, C., Huang, J., & Pierce, J. (2015). Robust models of CEO turnover: New evidence on relative performance evaluation. Review of Corporate Finance Studies, 7, 70–100.
- Fisman, R., & Miguel, E. (2007). Corruption, norms, and legal enforcement: Evidence from diplomatic parking tickets. Journal of Political Economy, 115, 1020–1048.
- Fernandes, N., Ferrerira, M., Matos, P., & Murphy, K. (2013). Are US CEOs paid more? New international evidence. Review of Financial Studies, 26, 323–367.
- Guo, L., & Masulis, R. (2015). Board structure and monitoring: New evidence from CEO turnovers. Review of Financial Studies, 28, 2770–2811.
- Hermalin, B., & Weisbach, M. (1998). Endogenously chosen boards of directors and their monitoring of the CEO. American Economic Review, 88, 96–118.
- Hermalin, B., & Weisbach, M. (2003). Board of directors as an endogenously determined institution: A survey of the economic literature. Economic Policy Review, 9, 7–26.
- Johnson, S., La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2000). Tunneling. American Economic Review, 90, 22–27.
- La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (1998). Law and finance. Journal of Political Economy, 106, 1113–1155.
- La Porta, R., Lopez-de-Silanes, F., Shleifer, A., & Vishny, R. (2002). Investor protection and corporate valuation. Journal of Finance, 57, 1147–1170.
- La Porta, R., Lopez-de-Silanes, F., & Shleifer, A. (2006). What works in securities laws? Journal of Finance, 61, 1–32.
- Masulis, R. W., Wang, C., & Xie, F. (2007). Corporate governance and acquirer returns. Journal of Finance, 62, 1851–1889
- Mironov, M., & Zhuravskaya, E. (2016). Corruption in procurement and the political cycle in tunneling: Evidence from financial transactions data. American Economic Journal: Economic Policy, 8, 287–321.
- Moeller, S., Schlingemann, F., & Stulz, R. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73, 201–228.
- Organisation for Economic Co-operation and Development. (2004). Survey of corporate governance developments in OECD countries. Paris, France: Author.
- Oxelheim, L., & Randoy, T. (2005). The Anglo-American financial influence on CEO compensation in non-Anglo-American firms. Journal of International Business Studies, 36, 470–483.
- Ryan, Jr., H. E., & Wiggins, III, R. A. (2004). Who is in whose pocket? Director compensation, board independence, and barriers to effective monitoring. Journal of Financial Economics, 73, 497–524.
- Salinger, M. (1992). Standard errors in event studies. Journal of Financial and Quantitative Analysis, 27, 39–53.
- Sanders, W., & Carpenter, M. (1998). Internationalization and firm governance: The roles of CEO compensation, top team composition, and board structure. Academy of Management Journal, 41, 158–176.
- Shleifer, A., & Vishny, R. W. (1997). The Limits of arbitrage. Journal of Finance, 52, 35–55.
- Southam, C., & Sapp, S. (2010). Executive labor markets: What can we learn from cross-listed firms? Journal of International Business Studies, 41, 70–87.
- Spamann, H. (2010). The “antidirector rights index” revisited. Review of Financial Studies, 23, 467–486.
- Stulz, R. (1999). Globalization, corporate finance, and the cost of capital. Journal of Applied Corporate Finance, 12, 8–25.
10.1111/j.1745-6622.1999.tb00027.x Google Scholar
- Svensson, J. (2005). Eight questions about corruption. Journal of Economic Perspectives, 19, 19–42.
- Yermack, D. (2004). Remuneration, retention, and reputation incentives for outside directors. Journal of Finance, 59(5), 2281–2308.
