Corporate Governance and Managerial Compensation Horizon under Common Ownership

Abstract

This paper studies the impact of corporate governance mechanisms on managerial compensation horizon under common ownership. We find that the predominant governance approach under common ownership is the threat of exit, which inadvertently exacerbates managerial myopia. Hence, common owners tend to grant long duration pay in managerial compensation contract to mitigate such an adverse consequence. Using financial mergers as exogenous shocks for the difference-in-differences analyses, we show that our results are robust to the endogeneity concerns. Further cross-sectional analyses provide strong evidence supporting this notion as we find that the positive relation between common ownership and CEO pay duration strengthens with higher liquidity, worse information asymmetry, weaker governance, and in states with non-compete agreement enforcement. Long-pay duration under common ownership is effective in mitigating managerial myopia as it improves firm long-term performance and reduces stock price crash risk. Additional tests show that active common owners tend to award long pay duration while passive common owners tend to use short pay duration, and our results are robust to other executives.