CEO Pay Slice and Firm Value: Is Corporate Social Responsibility a Missing Link? Prachi Gala and Duncan Nicol
Coles Working Paper Series, FALL22-01, November 2022
OVERVIEW
The topic of pay disparity in the upper echelons has recently attracted scholarly attention, but the mechanisms that explain its performance effects remain obscure. Based on stakeholder theory, we propose that pay disparity, calculated as CEO pay slice (CPS), affects levels of investment in internally and externally oriented corporate social responsibility (CSR) initiatives, which can affect firm value. Results derived from a large, longitudinal sample of US-based public firms support a partial mediation model where internal, but not external CSR initiatives mediate the negative relationship between CPS and firm value. While external CSR investments were positively associated with firm value, CPS did not affect them significantly. Note that we adopted an instrumental variable approach to address endogeneity concerns between CPS and firm value. Findings remain consistent across analytical specifications and econometric techniques, enhancing confidence in our theory and results. Our findings show that the negative impact of a large compensation differential between the CEO and the rest of the executive team extends beyond tactical, individual actions like shirking (Henderson & Fredrickson, 2001) or aggressive interpersonal behaviors (Dye, 1984). Firm–level outcomes, such as CSR investments and capital market valuations, extend the influence of these policy decisions
54 | Working Papers
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