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Executive Pay Disparity and the Cost of Equity Capital

Published online by Cambridge University Press:  13 June 2013

Zhihong Chen ,
Yuan Huang  and
K. C. John Wei
Zhihong Chen
Affiliation:
[email protected], College of Business, City University of Hong Kong, Tat Chee Ave, Kowloon, Hong Kong
Yuan Huang
Affiliation:
[email protected], School of Accounting and Finance, Hong Kong Polytechnic University, Hunghom, Kowloon, Hong Kong
K. C. John Wei
Affiliation:
[email protected], School of Business and Management, Hong Kong University of Science and Technology, Clear Water Bay, Kowloon, Hong Kong
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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.

Type
Research Articles
Information
Journal of Financial and Quantitative Analysis , Volume 48 , Issue 3 , June 2013 , pp. 849 - 885
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2013 

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