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Foundation-controlled firms and CEO compensation

Nguyen, Diem LU orcid and Moursli, Reda LU (2024) In International Review of Financial Analysis 95.
Abstract
We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants.... (More)
We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants. Lastly, there is no conclusive evidence of differences in the levels of cash compensation. Our findings support the view that incentive contracts can substitute for large shareholder monitoring. (Less)
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author
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organization
publishing date
type
Contribution to journal
publication status
published
subject
keywords
Foundation, Executive compensation, Family firms, Monitoring
in
International Review of Financial Analysis
volume
95
publisher
North-Holland
external identifiers
  • scopus:85198291160
ISSN
1057-5219
DOI
10.1016/j.irfa.2024.103417
language
English
LU publication?
yes
id
7f96ef9f-63b9-4adf-90e8-c747ad35b484
date added to LUP
2024-07-11 16:53:40
date last changed
2024-08-06 14:31:56
@article{7f96ef9f-63b9-4adf-90e8-c747ad35b484,
  abstract     = {{We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants. Lastly, there is no conclusive evidence of differences in the levels of cash compensation. Our findings support the view that incentive contracts can substitute for large shareholder monitoring.}},
  author       = {{Nguyen, Diem and Moursli, Reda}},
  issn         = {{1057-5219}},
  keywords     = {{Foundation; Executive compensation; Family firms; Monitoring}},
  language     = {{eng}},
  publisher    = {{North-Holland}},
  series       = {{International Review of Financial Analysis}},
  title        = {{Foundation-controlled firms and CEO compensation}},
  url          = {{http://dx.doi.org/10.1016/j.irfa.2024.103417}},
  doi          = {{10.1016/j.irfa.2024.103417}},
  volume       = {{95}},
  year         = {{2024}},
}