The Endogeneity of Managerial Compensation in Firm Valuation: A Solution
Author: Palia D.1
Source: Review of Financial Studies, Volume 14, Number 3, 2001 , pp. 735-764(30)
Publisher: Oxford University Press
- The Review of Financial Studies is a major forum for the promotion and wide dissemination of significant new research in financial economics. As reflected by its broadly based editorial board, the Review balances theoretical and empirical contributions. The primary criteria for publishing a paper are its quality and importance to the field of finance, without undue regard to its technical difficulty. Finance is interpreted broadly to include the interface between finance and economics. The Review is sponsored by The Society for Financial Studies. The editors of the Review and officers of the Society are elected for limited terms.
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Abstract:
Much of the empirical literature that has examined the functional relationship between firm value and managerial ownership levels assumes that managerial ownership levels are exogenous and are the only component of managerial compensation related to firm performance. This assumption is contrary to the theoretical and empirical literature wherein managerial compensation is endogenously determined and includes both shares and options. Using instruments for managerial compensation and panel data to control for unobservable heterogeneity in the firm's contracting environment, we estimate a system of simultaneous equations. We find that firms are in equilibrium when they endogenously set their chief executive officer's compensation.
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