Sarah Joanne Lindop

Executive Pay and Performance: The Moderating Effect of CEO Power and Governance Structure

Abstract This paper examines the crucial question of whether chief executive officer (CEO) power and corporate governance (CG) structure can moderate the pay-for-performance sensitivity (PPS) using a large up-to-date South African data-set. Our findings are threefold. First, when direct links between executive pay and performance are examined, we find a positive, but relatively small PPS. Second, our results show that in a context of concentrated ownership and weak board structures; the second-tier agency conflict (director monitoring power and opportunism) is stronger than the first-tier agency problem (CEO power and self-interest). Third, additional analysis suggests that CEO power and CG structure have a moderating effect on the PPS. Specifically, we find that the PPS is higher in firms with more reputable, founding and shareholding CEOs, higher ownership by directors and institutions, and independent nomination and remuneration committees, but lower in firms with larger boards, more powerful and long-tenured CEOs. Overall, our evidence sheds new important theoretical and empirical insights on explaining the PPS with specific focus on the predictions of the optimal contracting and managerial power hypotheses. The findings are generally robust across a raft of econometric models that control for different types of endogeneities, pay, and performance proxies.

Dividend taxation and the pricing of UK Equities

Purpose - – The purpose of this paper is to investigate the extent to which UK equity prices reflect shareholder level taxation on dividends (dividend tax capitalisation). Despite an extensive theoretical and empirical literature controversy exists. Design/methodology/approach - – Using a sample of UK firm year ends from 1991 to 2007 archival accounting and share price data are used to test for the presence or otherwise of dividend tax capitalisation. Findings - – The paper finds evidence of equity values reflecting shareholder level dividend taxation. In particular, a significant reduction in the valuation of retained earnings, a measure of dividend paying potential, is observed around the July 1997 abolition of the repayment of dividend tax credits to tax exempt shareholders. This suggests a link between shareholder level taxation of dividends and firms’ cost of capital. Research limitations/implications - – The analysis focuses on share prices and is therefore subject to an underlying assumption of shareholders’ understanding tax and other potential relevant information. Practical implications - – The taxation of dividends is an important issue because of the potential for it to influence firms’ cost of capital and therefore investment decisions. Further, non-tax costs may be incurred to the extent that attempts are made to mitigate any “adverse” tax effects. Social implications - – The results indicate that taxation of dividends and share prices are associated and therefore also indirectly firms’ cost of capital. This linkage has implications for investment appraisal and the allocation of capital between competing demands. Originality/value - – In using an asset valuation approach the limitations of alternate methods of examining shareholder level taxation of dividends are avoided, e.g. analysis of dividend drop of ratios.