CEO compensation The Influence Of foreign And Institutional Investors

Abstract

The mandatory thesis on “Ceo Compensation” has been very beneficial to have practical exposure of how things really go in the market. Being a student this exposure provided me the best practical understanding of market. I started this thesis with a very basic knowledge, but after I implicated into deep concerns; I realize this as a very interesting analysis. I am proud to work on this thesis with is experience will surely help me in my future. The absolute guidance and concern of my respected supervisor has also given me new directions in-order to do this job more accurately. This thesis is based on how connection between CEO compensation and institutional and foreign ownership using data on Swedish firms. I study the level of pay and performance-based compensation as ill as probe further into determinants of CEO compensation in Sweden. I model CEO and director compensation using different firm’s characteristics, CEO characteristics, and governance variables. After controlling for monitoring proxies, i find a significant positive relationship between CEO and director compensation with institutional and foreign investors. I hypothesize that this relationship could be due to unobserved firm complexity (omitted variables), and/or to excess compensation of directors and managers. I also find evidence that excess compensation (both director and CEO) is associated with firm underperformance. I therefore conclude that the evidence is consistent with excessive compensation due to mutual back scratching or cronyism. The evidence suggests that excessive compensation has an effect on firm performance that is independent of the poor governance variables discussed by previous studies.

This empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay The purpose of this thesis is also to contribute to studies on the connection between CEO compensation and institutional and foreign ownership using data on Swedish firms. Evidence from the United States and Canada supports that institutional investor’s affect CEO compensation (e.g. Hartzell and Starks, 2003, Gillian et al., 2000). I wish to investigate if this is valid for Sweden due to the large concentration of institutional owners. 7 of the 10 largest owners on the Swedish stock market are institutions (Sundin and Sundqvist, 2007). Based on the results from previous studies, i expect the effect on the level of compensation to be negative, while i expect a positive effect on performance-based compensation (e.g. Hartzell and Starks, 2003). The influence of foreign ownership is interesting to investigate primarily due to the lack of knowledge of how foreign investors affect CEO compensation. Further, the effect of foreign ownership is relevant and interesting due to the significant increase in foreign ownership in the Swedish stock market, from 8 to 37 percent of total market capitalization, over the past 15 years (Sundin and Sundqvist, 2007). I believe foreign ownership will have a positive impact on both the level of compensation and performance-based pay. This is based on that foreign owners represent a culture of higher pay and that they may prefer a larger portion of performance based pay due to the difficulty of monitoring from a distance. This thesis contributes to the research area on the determinants of CEO compensation by shedding light on the effect of institutional investors on CEO compensation on the Swedish market as ill as conduct an initial study of the potential effect of foreign investors.