Working Paper: CEPR ID: DP5119
Authors: Fei Li; Masako Ueda
Abstract: We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.
Keywords: Principal-Agent Problem; Sorting
JEL Codes: G39
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| CEO with low disutility of effort (D29) | safer firm (L10) |
| safer firm (L10) | higher compensation for CEOs (M12) |
| experienced CEOs (M12) | riskier firms (G32) |
| CEO characteristics (M12) | firm risk (G32) |
| wealthier CEOs (M12) | riskier firms (G32) |
| safer firms (L25) | lower CEO compensation (M12) |
| educational achievement (I24) | firm risk (G32) |