Date of Award

1999

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Department

Accounting

First Advisor

Andrew A. Christie

Second Advisor

Donald R. Deis

Abstract

Incentive contracts and monitoring by boards of directors and blockholders are alternative internal mechanisms to ensure that managers act in the interests of shareholders. Most prior research on compensation and performance ignores endogeneity among board, ownership and compensation structure (mix of pay) variables. Ignoring the endogeneity leads to inconsistent parameter estimates. I address the endogeneity problem by using a simultaneous equations model. The three equations in the system are mix of pay, compensation and performance. The results are consistent with efficient contracting. Mix of pay depends on characteristics of the firm and alternative governance mechanisms. The relation between stockholders and debtholders affects the relation between managers and stockholders. Financial leverage has a significant effect on mix of pay. Compensation and performance equations show that mix of pay is endogenous and belongs in both equations as an explanatory variable. Mix of pay is significantly positive in the compensation equation, consistent with the prediction that higher incentive based compensation leads to higher compensation risk and hence higher compensation. Neither mix of pay nor the board and ownership variables is significant in the performance equation, suggesting that firms choose optimal combinations of governance mechanisms. The direct effect of regulation on compensation reported in prior studies is spurious. The evidence provided shows that this effect is caused by omitting mix of pay from the compensation equation.

ISBN

9780599636194

Pages

87

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