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The effect of ownership concentration on CEO compensation‐firm performance relationship in New Zealand

The effect of ownership concentration on CEO compensation‐firm performance relationship in New... Purpose – The purpose of this paper is to investigate the effect of ownership concentration on CEO compensation and firm performance relationship in New Zealand. Design/methodology/approach – The paper applies regression analysis to data from New Zealand listed companies from 2001 to 2005. Findings – The study finds a non‐linear effect of ownership concentration on CEO compensation‐firm performance relationship, that is CEO compensation is negatively (positively) related to firm performance in firms with high (low) concentrated ownership structure respectively. Research limitations/implications – Results provide evidence for the proposition that ownership concentration at a high level in New Zealand does not constrain excessive management power, but exacerbates agency problems associated with executive pay. A highly concentrated ownership structure provides potential explanation for the misalignment between CEO compensation and firm performance in New Zealand. The positive effect of a low ownership concentration level on CEO compensation‐firm performance relationship suggests that monitoring the efficiency of large shareholders works better at a low ownership concentration level. Originality/value – By exploring the non‐linear interaction between two governance mechanisms – CEO compensation and ownership concentration – the findings of the study make contributions to the current compensation and ownership literature mainly in two ways: although the non‐linearity between ownership concentration and firm value has attracted extensive research interest, little attention is given to the non‐linear effect of large shareholding on the CEO compensation contract in prior studies; and, in the context of a developed country with a small financial market, there are low regulatory “drag” and virtual absence of a litigation threat to organisations, as in New Zealand. This study suggests concentrated ownership as an underlying explanation for the misalignment between CEO compensation and firm performance. http://www.deepdyve.com/assets/images/DeepDyve-Logo-lg.png Pacific Accounting Review Emerald Publishing

The effect of ownership concentration on CEO compensation‐firm performance relationship in New Zealand

Pacific Accounting Review , Volume 21 (2): 28 – Sep 11, 2009

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Publisher
Emerald Publishing
Copyright
Copyright © 2009 Emerald Group Publishing Limited. All rights reserved.
ISSN
0114-0582
DOI
10.1108/01140580911002053
Publisher site
See Article on Publisher Site

Abstract

Purpose – The purpose of this paper is to investigate the effect of ownership concentration on CEO compensation and firm performance relationship in New Zealand. Design/methodology/approach – The paper applies regression analysis to data from New Zealand listed companies from 2001 to 2005. Findings – The study finds a non‐linear effect of ownership concentration on CEO compensation‐firm performance relationship, that is CEO compensation is negatively (positively) related to firm performance in firms with high (low) concentrated ownership structure respectively. Research limitations/implications – Results provide evidence for the proposition that ownership concentration at a high level in New Zealand does not constrain excessive management power, but exacerbates agency problems associated with executive pay. A highly concentrated ownership structure provides potential explanation for the misalignment between CEO compensation and firm performance in New Zealand. The positive effect of a low ownership concentration level on CEO compensation‐firm performance relationship suggests that monitoring the efficiency of large shareholders works better at a low ownership concentration level. Originality/value – By exploring the non‐linear interaction between two governance mechanisms – CEO compensation and ownership concentration – the findings of the study make contributions to the current compensation and ownership literature mainly in two ways: although the non‐linearity between ownership concentration and firm value has attracted extensive research interest, little attention is given to the non‐linear effect of large shareholding on the CEO compensation contract in prior studies; and, in the context of a developed country with a small financial market, there are low regulatory “drag” and virtual absence of a litigation threat to organisations, as in New Zealand. This study suggests concentrated ownership as an underlying explanation for the misalignment between CEO compensation and firm performance.

Journal

Pacific Accounting ReviewEmerald Publishing

Published: Sep 11, 2009

Keywords: Chief executives; Company performance; New Zealand

References

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