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Do corporate governance practices affect CEO compensation? The moderating effect of economic freedom on corporate governance - CEO compensation relationship: an international study

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2019
Akgün, Şahin.
This study analyzes the association between corporate governance and CEO compensation adopting the “Agency Theory” and “Managerial Power Theory”. First, we examine the direct relationship between corporate governance indicators (such as board structure, employee representatives on board, CEO duality, board independence, institutional share ownership, and insider share ownership) and CEO compensation. Second, the study concentrates on the moderating effect of firm performance on corporate governance – CEO compensation relationship. Third, the moderating effect of economic freedom on corporate governance – CEO compensation relationship is investigated. Our sample includes companies from the United States, and 30 European Union Member and Western European countries. The results show that there is a significant relationship between corporate governance indicators and CEO compensation. In addition, findings indicate that firm performance moderates the relationship between corporate governance and CEO compensation. Moreover, the level of economic freedom in a country has a significant effect on the relationship v between corporate governance and CEO compensation for the percentage of independent directors on boards and the percentage of outstanding shares held by insiders. The results of this study show that corporate governance has a strong effect on CEO compensation. Additionally, firm performance and the level of economic freedom in countries moderates the effectiveness of governance indicators and create a change in the level of CEO compensation. The context of this study is closely related to companies’ internal and external environments, that both directors and managers might consider enforcing certain governance practices to reduce CEO power that is potentially harmful to corporations.