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Journal of Financial and Quantitative Analysis Vol. 48 No. 3 2013

Executive Pay Disparity and the Cost of Equity Capital

Zhihong Chen1,2,3,4,5,6; Yuan Huang1,2,3,4,5,6; K. C. John Wei1,2,3,4,5,6

1 Hong Kong Polytechnic University · 2 City University of Hong Kong · 3 Hong Kong University of Science and Technology · 4 Southwestern University of Finance and Economics · 5 Wuhan University · 6 University of Hong Kong

Abstract

Executive pay disparity, as measured by chief executive officer (CEO) pay slice (CPS), is positively associated with the implied cost of equity, even after controlling for other determinants of the cost of equity. The difference in the cost of equity can explain 43% of the difference in the valuation effect attributable to CPS reported by Bebchuk, Cremers, and Peyer (2011). Further analysis shows that the positive association is stronger when agency problems of free cash flow are more severe and when CEO succession planning is more important. Our evidence suggests that a large CPS is associated with CEO entrenchment and high succession risk.

DOI
10.1017/s0022109013000306
Volume
48
Issue
3
Pages
849-885
Language
en
Sources
bibtex:phds-export.bib openalex crossref

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