Working Paper: NBER ID: w17368
Authors: John R. Graham; Si Li; Jiaping Qiu
Abstract: We study the role of firm- and manager-specific heterogeneities in executive compensation. We decompose the variation in executive compensation and find that time invariant firm and especially manager fixed effects explain a majority of the variation in executive pay. We then show that in many settings, it is important to include fixed effects to mitigate potential omitted variable bias. Furthermore, we find that compensation fixed effects are significantly correlated with management styles (i.e., manager fixed effects in corporate policies). Finally, the method used in the paper has a number of potential applications in financial economics.
Keywords: executive compensation; managerial attributes; fixed effects; omitted variable bias
JEL Codes: C23; G22; G3; J24; J31; J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| firm and manager fixed effects (D22) | executive compensation (M12) |
| manager fixed effects (C23) | executive compensation (M12) |
| unobserved managerial characteristics (L20) | perceived impact of observable firm characteristics (L25) |
| ignoring fixed effects (C23) | biased coefficient estimates for other variables (C29) |
| management styles (M54) | compensation (M52) |