||What does Matter in Determining Insider Compensation? Performance or Governance?
||Department of Accountancy
While the directors in American firms are considered more likely to be influenced by CEOs in determining executives’ compensation (e.g., Jensen, 1993; Cystal, 1991; Core et al, 1999), the directors in Taiwanese firms play an importance role in setting compensation for executives and directors themselves (e.g., Chen, 2002; Yeh and Woidtke, 2003). Prior literatures have not yet documented a relation among director compensation, corporate governance mechanism, and firm performance. This paper examines the determinants of compensation for executives and directors in Taiwanese firms, and investigates how corporate governance mechanisms affect various insider compensation and firm performance.
We first establish a database with data of insider compensation of all listed companies from 1998 to 2002, within which the compensation is further grouped based on the status of insiders: directors, professional managers, executive directors, and all insiders. A simultaneous equations system is constructed and both OLS and 3SLS are adopted regression methodologies to test the system.
The empirical test results imply some important messages. First, the current firm performance is affected by joint effect of previous firm performance and previous insiders’ compensation. Second, when director ownership is higher, the firm performs better and pays less compensation to insiders. Third, when firms have large shareholders, managers are less likely to receive higher compensation. Finally, the standing director and professional manager exists a substitutive relation. Our empirical results imply that directors in Taiwanese firms play an important role in managing firms.
CHAPTER1. INTRODUCTIONS 1
1.1. MOTIVATIONS 1
1.2. PURPOSE OF RESEARCH 3
1.3. IMPORTANCE OF RESEARCH 4
1.4. STRUCTURE OF PAPER 4
CHAPTER 2. LITERATURE REVIEW 5
2.1. AGENCY THEORY AND EXECUTIVE COMPENSATION CONTRACT 5
2.2. DETERMINANTS OF EXECUTIVE COMPENSATION 7
2.2.1. Firm characteristics 7
2.2.2.Industry characteristics 8
2.2.3. Corporate governance mechanisms 9
2.2.4. Firm Performance 11
CHAPTER 3. DEVELOPMENT OF HYPOTHESES 11
CHAPTER 4. METHODOLOGY 16
4.1. DATA AND SAMPLE COLLECTION 16
4.2.VARIABLES DEFINITION 16
4.2.1 Performance variables 16
4.2.2 Compensation variables 17
4.2.3 Strategic variables 18
4.2.4 Corporate governance variables 18
4.2.5 Control variables 19
4.3. DESCRIPTIVE STATISTICS ANALYSIS 19
4.4. CORRELATION ANALYSIS 21
4.5. TESTING MODEL 21
CHAPTER 5. EMPIRICAL RESULT 23
5.1. RESULTS OF OLS 24
5.4. RESULTS OF 3SLS 30
5.5. SUMMARY OF EMPIRICAL RESULTS 31
CHAPTER6. CONCLUSIONS 32
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