Oct 21 Corporate Governance, Chief Executive

Journal of Financial Economics 51 (1999) 371—406

Corporate governance, chief executive officer compensation, and firm performance

John E. Core, Robert W. Holthausen*, David F. Larcker

2400 Steinberg-Dietrich Hall, The Wharton School, University of Pennsylvania, Philadelphia, PA, 19104-6365, USA Received 19 March 1997; received in revised form 1 July 1998

Abstract We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse. 1999 Elsevier Science S.A. All rights reserved. JEL classification: G30; G32; J33; L22 Keywords: Corporate governance; CEO compensation; Board-of-directors; Ownership structure; Financial performance

* Corresponding author. Tel.: 1 215 898 7781; fax: #1 215 573 2054; e-mail: holthausen@ wharton.upenn.edu.  The financial support of Nomura Securities and Ernst & Young LLP is gratefully acknowledged. We appreciate the able research assistance of Dan Nunn. We acknowledge the helpful comments of Abbie Smith (the referee), Kevin Murphy, and workshop participants at Columbia University, the University of California — Los Angeles, the University of Colorado — Boulder, Harvard University, George Washington University, Massachusetts Institute of Technology, New York University,...