CEO compensation, family control, and institutional investors in Continental Europe

Journal of Banking & Finance 36 (2012) 3318–3335

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CEO compensation, family control, and institutional investors in Continental Europe Ettore Croci a,⇑, Halit Gonenc b, Neslihan Ozkan c a

Università Cattolica del Sacro Cuore, Largo Gemelli 1, 20123 Milan, Italy University of Groningen, Faculty of Economics and Business, P.O. Box 800, Groningen 9700 AV, Netherlands c University of Bristol, The School of Economics, Finance and Management, 8 Woodland Road, Bristol BS8 1TN, UK b

a r t i c l e

i n f o

Article history: Received 7 January 2012 Accepted 18 July 2012 Available online 27 July 2012 JEL classification: G34 Keywords: CEO compensation Family firms Institutional investors Europe

a b s t r a c t This paper investigates the impact of family control and institutional investors on CEO pay packages in Continental Europe, using a dataset of 754 listed firms with 3731 firm-year observations from 14 countries during 2001–2008. We find that family control curbs the level of CEO total and cash compensation, and the fraction of equity-based compensation. Moreover, we do not observe a significant effect of family control on the excess level of total and cash compensation. This evidence indicates that controlling families do not use CEO compensation to expropriate wealth from minority shareholders. We show that institutional ownership is associated with higher levels of CEO cash and total compensation in Continental Europe, especially in family firms. Also, foreign institutional investors have a positive and significant impact on CEO compensation level. Finally, results indicate that institutional investors affect CEO pay structure: they increase the use of equity-based compensation in both family and non-family firms. Ó 2012 Elsevier B.V. All rights reserved.

1. Introduction CEO pay has recently sparked an intense debate in Europe. Politicians have called excessive executive pay ‘‘scandalous’’ and a ‘‘social scourge’’1; the media and the public have raised eyebrows at lavish pay packages2; and institutional shareholders have voiced their concerns about executive pay.3 In response to these concerns, several European countries have introduced shareholder votes on executive compensation, following the UK example (Ferri and Maber, forthcoming).4 ⇑ Corresponding author. Tel.: +39 0272343012. E-mail addresses: [email protected] (E. Croci), [email protected] (H. Gonenc), [email protected] (N. Ozkan). 1 ‘‘Europe: A meeting of minds,’’ Richard Milne, Financial Times, February 28, 2010; ‘‘Germany gets tough on executive pay,’’ Bertrand Benoit, Financial Times, May 29, 2009; ‘‘Germany to target stock options in clampdown on executive pay,’’ Bertrand Benoit, Financial Times, July 10, 2008; ‘‘Dutch pioneers blaze trail on executive pay,’’ Richard Milne, Financial Times, August 31 2009; ‘‘France eyes curbs on executive pay,’’ Ben Hall, Financial Times, May 29, 2008; ‘‘Minder’s mission,’’ The Economist, Jun 21, 2007. 2 Wendelin Wiedeking, CEO of Porsche AG, became Europe’s highest-paid businessman by earning an estimated €67 million in 2008. ‘‘Accent on égalité: Europe loses patience with its wealthy elite,’’ John Thornhill, Richard Milne and Michael Steen, Financial Times, June 8, 2008. 3 ’’European investors balk at director pay,’’ Kate Burgess and Richard Milne, Financial Times, June 1, 2009. Some firms among those where institutional investors blocked the CEO compensation are: Heineken, Volvo, and Carrefour. 4 An advisory shareholder vote on CEO compensation also exists in France and Spain. The Netherlands introduced a mandatory shareholder vote in 2004, and Sweden and Norway followed in 2006 and 2007. In Germany, the Gesetz zur Angemessenheit der Vorstandsvergütung (VorstAG) of August 2009 introduces several changes to the management boards’ remuneration policies. An advisory shareholder vote on CEO compensation has been introduced also in the US in 2011. 0378-4266/$ - see front matter Ó 2012 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.jbankfin.2012.07.017

The widespread media and public attention on CEO compensation packages suggest that the design of the pay structure in Europe deserves closer scrutiny. In this paper, we focus on two important factors in designing CEO compensation packages in European firms: (1) the dominant role of family control in Continental Europe (Faccio and Lang, 2002); and (2) the increasing role of institutional investors, especially foreign institutional investors (Ferreira and Matos, 2008). In particular, we examine how controlling family shareholders and institutional investors influence the level and structure of CEO compensation, and how institutional investors interact with controlling family shareholders in this process. Continental European firms offer an interesting setting to explore these relationships. Corporate ownership in Continental Europe, with its high level of ownership concentration, mainly by family owners, differs from those in the UK and US, where widely held firms are more common. Continental European countries are characterized as having relatively low investor protection and less developed financial markets compared to the UK (Franks et al., forthcoming). The previous research on CEO compensation has mainly focused on the US and the UK (Conyon and Murphy, 2000; Conyon et al., 2011).5 This paper aims to fill this gap by focusing on CEO compensation in Continental European countries. The extant literature explains CEO compensation by referring to two theories: optimal contract theory (Gomez-Mejia and Wise5 Recent literature (Villalonga and Amit, 2006; Holderness, 2009) has shown that family firms are quite common, even in the US. However, compared to Continental European countries, family control is less widespread. Li et al. (2012) examine the role of tournament incentives in designing CEO compensation in family firms in the US.

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man, 1997; Core and Larcker, 2002) and managerial power theory (Bebchuk and Fried, 2003).6 According to optimal contracting theory, CEO compensation is viewed as the product of arm’s length relations between boards, which represent the shareholders’ interests, and CEOs. Boards provide CEOs with efficient incentives for reducing agency problems that arise from separation of ownership and control. Alternatively, managerial power theory suggests that CEOs have the power to control the board and set their own compensation, subject only to an outrage constraint (Bebchuk and Fried, 2003; Weisbach, 2007). Thus, CEO compensation can be part of an agency problem rather than a solution. In this context, shareholders can provide monitoring, but they will not have incentives to do so unless they have substantial share ownership, which would justify their effort and the cost they incur while monitoring (Shleifer and Vishny, 1986). Family ownership can affect CEO compensation packages in one of two competing ways: the entrenchment effect and the alignment effect. The entrenchment effect is related to the conflict between controlling shareholders (who can choose the managers) and minority shareholders. Families with major share ownership can expropriate wealth from minority shareholders in several ways (Morck and Yeung, 2003; Bertrand and Schoar, 2006), including excessive compensation packages. In particular, when a family member holds a CEO position, families can set CEO compensation packages at opportunistically high levels to enrich the family CEO and expropriate wealth from other shareholders. This argument would provide support for managerial power theory, which suggests that CEOs with power can set their own compensation arrangements. The competing view for the effect of family ownership on CEO compensation packages is the alignment effect, which relates to the optimal contract theory and is based on the argument that concentrated ownership creates more incentives for monitoring (Shleifer and Vishny, 1997). This view suggests that family owners would monitor CEO compensation packages more effectively and would put a check on the level of CEO compensation. Furthermore, Gomez-Mejia et al. (2003) note that risk-averse CEOs might be willing to accept a lower compensation in exchange for higher job security in family firms, especially if they are related to owners.7 Family ties also increase commitment to the firm and reduce the value of outside options: a family CEO would be less likely to leave the firm for another company. Accordingly, the alignment effect implies that family firms, in particular, those with family CEOs, would be less likely to engage in the opportunistic behavior of offering excessive pay to their CEOs. While family control is common in Continental Europe, share ownership of institutional investors, and in particular, those of foreign institutional investors, has recently grown considerably (Ferreira and Matos, 2008; Ruiz-Mallorquí and Santana-Martín, 2011). However, there has been no evidence on how institutional investors influence CEO compensation in firms with controlling family shareholders. Institutional investors might reduce their monitoring if the alignment effect prevails and the controlling family monitors CEO compensation effectively and avoids excessive levels of CEO compensation. On the other hand, in the presence of the entrenchment effect, institutional investors might take an activist approach and provide monitoring for CEO compensation by steering clear of excessive CEO compensation levels and pushing for a pay-for-performance link.

In this paper, we examine a large panel data of Continental European firms over the period 2001–2008, which consists of 3731 firm-year observations and 754 firms. Different from previous studies focusing on executive compensation in individual European countries, we examine CEO compensation practices in 14 Continental European countries.8 Our findings provide general support for the alignment effect of controlling family shareholders. In fact, we find that firms with family control offer their CEOs lower compensation than those firms without family control (non-family firms), controlling for firm-specific and CEO-specific characteristics. The average total compensation for a CEO in a family firm is €1.437 million (median €609,298), while a CEO in non-family firms receive on average €1.714 million (median €834,120). Further, family CEOs (average €1.164 million, median €427,450) are paid less than professional CEOs in family firms (average €1.615 million, median €753,897). Moreover, we do not find any evidence of excessive pay, i.e., pay above the predicted level based on a firm’s characteristics, in family firms, suggesting that families do not use CEO compensation to expropriate minority shareholders. Our results show that institutional ownership is associated with higher levels of CEO cash and total compensation in Continental Europe. While this finding is in line with Fernandes et al. (2012), it is contrary to the findings of Ozkan (2011) for the UK and previous US-based studies (e.g., Hartzell and Starks, 2003), which report that institutional investors negatively affect the level of CEO total compensation and cash compensation. We also observe that institutional investors behave differently in family firms than in non-family firms: they tend to increase the total and cash compensation in family firms, but not in non-family firms. Furthermore, while institutional investors push for more use of equity-based pay in both family and non-family firms, their impact is stronger in non-family firms. Further, our results show that foreign institutional investors have a positive and significant impact on the level of CEO compensation, while domestic institutional investors do not have any significant impact. This result is consistent with Fernandes et al. (2012), who observe that more ‘‘internationalized’’ firms offer larger CEO pay. We also find that both domestic and foreign institutional investors significantly affect CEO pay structure, contributing to an increase in the use of equity-based pay. This paper offers contributions to the two strands of the literature. Firstly, our results complement the empirical findings of Conyon et al. (2010) and Fernandes et al. (2012), who also use crosscountry data for their analyses of executive compensation. Differently from those studies, we focus on the effect of family control, institutional investors, and their interplay in Continental Europe.9 We show that family control curbs the level of CEO compensation, reducing both the cash and the equity-based components of the pay. Secondly, this paper adds to the literature on institutional investors. Prior studies document that institutional investors, in particular, foreign institutional investors, have been actively involved in monitoring for various aspects of corporate decision-making, including CEO turnover, M&As, and capital expenditures (Ferreira and Matos, 2008; Ferreira et al., 2010; Aggarwal et al., 2011). We offer evidence that institutional investors partially counterbalance the negative effect on CEO compensation exerted by family-control. This result is particularly important in light of recent evidence (Ferreira and Matos, 2008; Ferreira et al., 2010; Aggarwal et al., 2011) that

6 As Bebchuk and Fried (2003) note, these two theories, while conceptually different, are not exclusive. In fact, they can both concur to shape compensation arrangements. 7 For instance, Volpin (2002) finds that the sensitivity of top executive turnover to performance is lower for those executives who are part of the family than it is for other executives.

8 The countries are: Austria, Belgium, Denmark, Finland, France, Germany, Greece, Italy, Netherlands, Norway, Portugal, Spain, Sweden, and Switzerland. 9 One limitation of our study is that due to different regulations in our sample countries prior to the EU legislation in 2006, the number of firms is smaller in the period 2001–2005. However, our results remain robust if we concentrate on the period from 2006 to 2008.

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there has been an increase of institutional ownership around the world. The remainder of the paper is structured as follows. Section 2 discusses the literature, formulates the hypotheses, and discusses the regulation concerning executive remuneration. Section 3 presents a description of the sample and summary statistics. Section 4 provides a discussion of the empirical tests and results about the effect of family control, institutional investors and their interaction with family control on CEO compensation. Section 5 concludes. 2. Literature review

pany and will be more prone to accept an even lower level of pay. Elston and Goldberg (2003) find a negative relationship between family control and executive compensation in Germany. Overall, the evidence of how family control can influence CEO compensation packages is rather inconclusive, which is perhaps not surprising, given the different time periods and compensation data types used in the literature. For instance, Elston and Goldberg (2003) use the total compensation of members of supervisory and managing boards as a measure of compensation because of the lack of data at the individual director level. However, our analysis is based on using CEO-level compensation data, including both cash and equity-based components of compensation.

2.1. The effect of family control on CEO compensation Concentrated family ownership is the most prevalent type of ownership structure in Continental Europe (La Porta et al., 1999; Barca and Becht, 2001; Faccio and Lang, 2002; Franks et al., forthcoming). Previous researchers, including Morck and Yeung (2003) and Bertrand and Schoar (2006), argue that decisions in family firms can be made in the interests of the controlling family, whose interests may diverge from the interests of minority shareholders. Families, as large shareholders, value control and are often involved in company management, even if this may lead to poor firm performance (Perez-Gonzalez, 2006; Bennedsen et al., 2007). Family control is likely to affect both the level and structure of CEO compensation packages, as suggested by the results of GomezMejia et al. (2003). Given the high value families place on control, family firms may be reluctant to grant their professional executives stock awards and stock options, thereby reducing the fraction of equity-based compensation executives receive. Moreover, the controlling family is often in a suitable position to monitor and, if necessary, to fire the CEO if she does not perform according to the family’s expectations. Thus, equity-based compensation might be relatively less important in family firms than in widely held firms, which would be more concerned about the alignment of the interests of CEOs and those of shareholders. Additionally, if a family member is the CEO, firms do not need to align her interests with those of the shareholders through offering her equity-based compensation. Thus, we would expect a CEO who is a family member to receive relatively less equity-based compensation. McConaughy (2000) reports evidence consistent with this hypothesis for the US. Families can also influence the level of CEO compensation. CEOs in family firms may receive larger compensation packages if they maximize the family’s wealth, allowing for the extraction of private benefits of control by the controlling family. Consistent with this argument, Barontini and Bozzi (2012) show that Italian family firms pay their CEOs more than other firms, and that family CEOs are paid more than professional CEOs. They interpret this result as an evidence of rent extraction, arguing that families over-compensate their CEOs to buy their loyalty and allow them to expropriate minority shareholders. Similar to Barontini and Bozzi (2012), Barak et al. (2011) provide evidence that excess compensation is a private benefit of control in Israel.10 However, they find that family CEOs are rewarded for poor performance, while professional CEOs are rewarded only when they increase firm value. Alternatively, family control could have a negative impact on the level of CEO compensation. Risk-averse executives could be willing to accept lower compensation in exchange for higher job security in family-controlled firms, especially if they are related to owners (Gomez-Mejia et al., 2003). Family ties also increase the commitment of the executive to the firm; therefore, CEOs in family firms will be less likely to leave the firm for another com10 Urzua (2009) shows that controlling families also use the compensation of chairmen and board members to tunnel resources out of firms in Chile.

2.2. The effect of institutional ownership on CEO compensation Institutional activism can benefit minority shareholders by reducing potential agency costs and by ensuring that managers act in the best interests of shareholders. Institutional investors, including mutual funds, pension funds, insurance companies, bank trusts, and university endowments, often own block shareholdings and alleviate the free-rider problem that occurs when ownership is dispersed. Thus, they can provide effective monitoring of the management and can affect key strategic policies in corporations, including decisions on CEO compensation packages (Gillan and Starks, 2000). Institutional investors could have a moderating impact on CEO compensation packages as part of their monitoring activities. Therefore, one would expect institutional ownership and CEO compensation to be negatively related. Additionally, institutional investors could encourage firms to provide more performancebased compensation to their CEOs, thus establishing a significant and positive relationship between the level of CEO pay and performance, as documented by Hartzell and Starks (2003) for US firms. However, Fernandes et al. (2012) document a positive relationship between institutional ownership and CEO pay, both in the US and around the world. They explain this positive relationship with the fact that institutional investors push for a higher fraction of equitybased compensation. Despite the growing presence of institutional investors in Continental European capital markets, there has been little evidence on their role in determining CEO compensation packages in Continental Europe, except for some evidence of the negative impact of banks on executive compensation in Germany (Elston and Goldberg, 2003). In Continental Europe, institutional investors can hold blocks of shares in family-controlled firms; therefore, they have to interact with the family owners. In these situations, they can provide monitoring for family owners and can help protect the interests of minority shareholders. Consequently, the presence of institutional investors can potentially reduce the agency costs in family firms (Tosi et al., 1999). Gomez-Mejia et al. (2003) argue that institutional shareholders should demand a lower emphasis on the long-term components of CEO compensation packages in family firms, especially if the CEO is a family member. In fact, the longterm components of CEO compensation, in the form of stock options or stock grants, would strengthen the ownership rights of the controlling family and the family CEO, and might contribute to more potential CEO entrenchment. Thus, institutional investors can play an active role in determining the CEO compensation structure in family firms. Given that foreign institutional ownership has increased considerably in Continental Europe within recent years (Ferreira and Matos, 2008), it is also important to understand how foreign institutional investors, as well as domestic institutional investors, influence corporate decisions on designing CEO compensation packages. Foreign institutional investors are less likely to have po-

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tential business relationships with firms; thus, we expect them to be more effective monitors. 2.3. Regulatory environment in European countries In this section, we discuss the regulatory environment in Europe concerning executive remuneration, in particular, recent changes in disclosure rules on executive compensation. Our sample includes firms from Continental European countries, which are all EU (European Union) members, with the exception of Norway and Switzerland. Even though Switzerland and Norway do not belong to the EU, Swiss and Norwegian firms compete on a level playing field with EU firms, and have similar regulatory rules in their capital markets (Ferrarini et al., 2009). Over the last decade, there has been a considerable effort to harmonize the disclosure rules on executive compensation across Europe. The first wave of reforms relates to the EU Commission’s May 2003 Company Law Action Plan (Ferrarini et al., 2009). Following this action plan, EU adopted two recommendations in 2004 and 2005 to improve corporate governance through better transparency and increased shareholder rights.11,12 The recommendations emphasize the importance of proper disclosure on executive compensation, including the cash and equity-based components of compensation and relevant performance criteria. Thus, remuneration reports should contain clear and comprehensible information about the remuneration of individual directors,13 enabling shareholders to monitor firms’ executive remuneration policy.14 Fernandes et al. (2012) argue that the EU Commission’s May 2003 Company Law Action Plan and the following 2004 Consultation on Executive Remuneration significantly improved CEO compensation disclosure in Continental European firms. To overcome differences among EU countries in the implementation of those recommendations, countries were given the choice between adoption through legislation or through soft law (the comply-or-explain principle). Ferrarini et al. (2009) report that the recommendations have been mainly transposed on a ‘‘comply-or-explain’’ basis, a principle already present in some countries, for instance, Germany. Generally, the rules on the disclosure of executive remuneration are included in the national corporate governance codes, not in national laws. Several European corporate governance codes and laws have been amended in the period following 2004–2005. In Germany, a law regulating the transparency of executive pay came into force in 2006 and individualized disclosure became a legal requirement (Andres 11 The two recommendations are: the 2004 Recommendation fostering an appropriate regime for the remuneration of directors of listed companies; and the 2005 Recommendation on the role of non-executive or supervisory directors of listed companies and on the committees of the (supervisory) board. 12 Building on provisions already adopted in European countries, two new EU Recommendations were published in 2009 in response to the financial crisis. These recommendations aim at reforming the design of pay packages and to reform remuneration policies in the financial sector, and they also recommend more extensive disclosure and seek to strengthen the remuneration committee. 13 Despite the recommendation, Continental European countries do not specifically require companies to produce a separate remuneration report, and no specific requirement exists at all in Greece. The information related to the remuneration of directors can be included anywhere in the annual report, i.e., in the corporate governance report, in the management report and/or in the notes to the financial statements (for example, Germany). 14 Disclosure on the individual director’s remuneration includes: (i) the total amount of salary paid, including attendance fees fixed by the AGM; (ii) the remuneration paid in the form of profit-sharing and/or bonus payments and the reason for granting; (iii) the compensation in connection with the termination of contract; (iv) the total estimated value of non-cash benefits considered as remuneration; (v) the number of share options offered or granted; (vi) the number of shares exercised, exercise price or value of interest; (vii) the number of shares unexercised, exercise price, exercise date, main conditions for exercise of rights; and (viii) the loans, advance payments and guarantees, including the amounts outstanding and the interest rates.

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and Theissen, 2008).15,16 Other changes took place, for example, in Italy, France and the Netherlands.17 Thus, the recommendations, with the goal of increasing transparency and improving shareholder power over the remuneration process, provide new guidelines on remuneration (Ferrarini et al., 2009). Following the recommendations, in many European countries the disclosure of executive remuneration has become mandatory on an individual director basis (Germany, France, the Netherlands, Belgium,18 Spain, and Austria for the management board19), and only a few countries still recommend only aggregate disclosure, for instance, Greece. Overall, our sample period of 2001–2008 corresponds to a period of active disclosure efforts on executive remuneration in Continental European countries. A major aim of these efforts has been to ensure that potential investors can monitor the remuneration policies of companies.

3. Data, model specification, and sample 3.1. Data We begin by extracting CEO compensation data for Continental European firms from BoardEx, a leading business networking service that provides in-depth information on executive compensation.20 Since the coverage of European firms in Boardex has improved considerably after 2000, we focus on the period from 2001 to 2008. Compensation data are available for 1067 Continental European firms during this period.21 We then obtain ownership data from the Thomson One Banker Ownership module, which provides detailed firm-level ownership information; financial data are drawn from Datastream/Worldscope. We require companies with compensation data from Boardex to have available ownership data from Thomson One Banker and financial data from Datastream/Worldscope. Our final sample consists of an unbalanced panel of 754 firms with 3731 firm/year observations. To identify CEOs we use BoardEx, which provides information on the roles of the directors, as disclosed in the companies’ annual reports. We collect both annual CEO cash and equity-based compensation data from BoardEx. Cash compensation includes base salary and bonus. Equity-based compensation includes the value of 15 In Germany, the first version of the 2002 Corporate Governance Code introduced the suggestion to report management board remuneration on an individual basis, but without much success. In 2003, individualized disclosure was included in the code as a recommendation (Andres and Theissen, 2008). 16 However, the general meeting has the power to waive these requirements with a resolution requiring a majority of at least three quarters of the share capital represented when the resolution is adopted (Ferrarini et al., 2009). The resolution can be adopted for a maximum of 5 years. 17 In Italy, the new Corporate Governance Code, published in 2006, distinguishes between executive and non-executive directors in the definition of the remuneration structure and terms. In Spain, according to the Unified Corporate Governance Code, the remuneration report should be submitted to the AGM for an advisory vote. In France, two recommendations aimed at enhancing disclosure and introducing guidelines on the link between remuneration and performance in the area of incentive-based pay and severance payments were published in 2008. In the same year, the amendments to the Dutch Corporate Governance Code attempted to align remuneration closely with the company’s strategy and related risks and encouraged a remuneration policy that would create long-term value. 18 In Belgium, individual disclosure of remuneration is required for non-executive directors and for the CEO. 19 The requirements to indicate the individual details of the remuneration paid do not apply to the members of the supervisory boards. 20 Fernandes et al. (2012) also use Boardex data for the non-US companies in their sample. 21 The number of firms per year differs from year to year, since some firms are added because of new listings, thus expanding BoardEx coverage. On the other hand, other firns were delisted during the sample period.

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shares, share options and long-term incentive plans (LTIPs) granted in a given year.22 3.2. Model specification and variables To investigate the relationship between family control, institutional investors and CEO compensation, we use the following two regression models:

LNðCOMPENSATIONit Þ ¼ a þ /1 FAMILY it þ /2 INSTOWNit þ /3 PERFORMANCEit þ

n X

ck GOVERNANCEk;it

k¼1

þ

m X dl CONTROL VARIABLESl;it þ eit

ð1Þ

l¼1

EQUITY RATIOit ¼ a þ /1 FAMILY it þ /2 INSTOWNit þ /3 PERFORMANCEit þ

n X

ck GOVERNANCEk;it

k¼1

þ

m X dl CONTROL VARIABLESl;it þ eit

ð2Þ

l¼1

where the dependent variable, LN(COMPENSATIONit), is either the log of the total CEO compensation, which is measured by the sum of the cash compensation (the sum of the base salary and bonus) and equity-based compensation (the sum of the value of stock options and awards granted during the year), or the log of cash compensation. EQUITY_RATIOit is a proxy for the structure of CEO pay (Mehran, 1995; Fernandes et al., 2012), and it is measured as the ratio of equity-based compensation to total compensation. For our estimation, we use pooled OLS with robust standard errors clustered at the firm level when the dependent variable is the total or cash compensation and a pooled Tobit model when the dependent variable is the ratio of equity-based compensation to total compensation. The Tobit estimation method for the ratio of equity-based compensation accounts for the censoring of equity-based compensation at zero. Following Hartzell and Starks (2003) and Ozkan (2011), among others, we use lagged explanatory variables to reduce the potential endogeneity problem in our regression models. Board structure varies across Continental European countries, where firms can have a one-tiered board structure, or two-tiered board structure, or both. Thus, to control for the omitted variables at the country level, we include country-specific dummies in our regression model. Further, year-specific dummies, which control for year-specific shocks that are common to all firms, and industry-specific dummies, which control for industry effects that might influence CEO compensation, are included. FAMILYit is a dummy variable for firms with a controlling family shareholder who has at least 10% of a firm’s outstanding shares, or alternatively, the largest shareholder owning at least 10% of outstanding shares who is ultimately controlled by a family.23 In an alternative specification, we also use a dummy variable for firms 22 Equity-based compensation is defined as the value of shares and options granted during a year. For the value of options, BoardEx provides two descriptions: (1) the intrinsic value of options awarded, which is part of equity-linked compensation and is calculated by multiplying the number of options awarded in the period by the difference of stock price; and (2) the estimated value of options awarded, which is a theoretical value used to calculate the potential value of the option during the vesting period by using the Black Sholes model. We use the latter because most of the time, the intrinsic value is not available. For the value of LTIPs, BoardEx displays the maximum value obtainable under the long-term incentive plan. 23 Using a 20% threshold to determine family control does not affect our results.

with a family CEO (FAMILYCEOit) who is a CEO belonging to the controlling family. INSTOWN is the percentage share ownership held by institutional investors, including banks and trusts, insurance companies, investment advisors, pension funds, research firms, and sovereign wealth funds. We use several different proxies to capture the effect of institutional investors: TOTINST is the sum of the percentage of stakes held by institutional investors in a company. We further classify institutional investors into domestic and foreign institutional investors. Following Ferreira et al. (2010), we define foreign institutional ownership (FORINST) as the percentage of shares held by all institutional investors domiciled in a country different from the one in which the company is incorporated. Domestic institutional ownership (DOMINST) is defined as the percentage of shares held by all institutional investors domiciled in the same country in which the company is incorporated. Following prior studies, two different measures of firm performance (PERFORMANCEit) are used: a market-based and an accounting-based performance measure. The market-based measure is ADJRETURN, which is the annual stock return adjusted for local market return in a country. The accounting-based performance measure is the industry-adjusted return on assets (INDADJROA), which is the firm’s ROA, the ratio of net income to total assets, minus the median industry ROA in the firm’s country.24 Agency theory suggests that a close link between CEO compensation and firm performance would help align the interests of shareholders with those of the CEO, and would therefore give incentives to the CEO to perform better. GOVERNANCEit controls for a set of governance variables that could have a significant impact on CEO compensation. It includes both board characteristics, such as board size, the proportion of independent non-executive directors, board busyness, CEO characteristics like CEO age,25 and a dummy variable for dual class equity structure. INDPDIR is the proportion of independent non-executive directors on the board.26 Independent directors are not affiliated with the company, so they would be expected to provide objective monitoring for the firm’s management and protect the interests of minority shareholders. Core et al. (1999) find that CEO compensation is higher when the proportion of independent directors is lower and the board size is larger. In contrast, Fernandes et al. (2012) find that the proportion of independent directors is positively associated with CEO compensation. Additionally, BOARDSIZE is the total number of executive and non-executive directors on a board. Other board characteristics, including the number of outside directorships held by directors, could also influence their monitoring ability and might have implications for CEO compensation packages. In fact, Ferris et al. (2003) and Fich and Shivdasani (2006) argue that serving on multiple boards overcommits an individual, and as a consequence, leads to shirking one’s responsibilities as a director. Following Fich and Shivdasani (2006), we use a variable measuring busyness of independent directors (BUSYBOARD). We would expect busy boards to be less effective in their monitoring function. A board is defined as busy if it has 50% or more of non-executive directors holding three or more directorships in the quoted companies. Concerning CEO characteristics, we control for CEO age (CEO AGE), which can either

24 We use the Fama and French 49-industry classification to determine the median ROA in a given country. 25 In the model we present in the paper, we do not include CEO tenure or the number of outside directorships held by the CEO because of their collinearity with BUSYBOARD and CEO AGE. In an unreported analysis, we also control for these two variables. The inclusion of these variables does not change our main results. 26 Using Boardex, we identify independent directors among so-called ‘‘supervisory directors’’ (SD). For this description, we look for the term ‘‘independent’’ or ‘‘independent NED’’ in the definitions of the role for SD, where NED stands for the non-executive director.

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Table 1 Descriptive statistics. This table reports the mean and median values of variables. The sample period is from 2001 to 2008. TOTAL_C is the total compensation. CASH_C is the total cash compensation, which is composed of salary and bonuses. EQUITY_C is equity-linked compensation, which is composed of shares, options, and long-term investment plans. EQUITY_RATIO is the ratio of equity-based compensation to total compensation. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder at the 10% level is a family. TOTINST is the total percentage of shares held by financial institutions. FORINST and DOMINST stand for foreign and domestic institutional ownership. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. SALES (total sales) are in thousands of Euros. ADJRETURN represents the annual stock return adjusted by the local market return. INDADJROA is the industry-adjusted ratio of net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of daily stock returns.

Panel A: Compensation (thousands of Euros) TOTAL_C CASH_C EQUITY_C EQUITY_RATIO Panel B: Ownership variables FAMILY TOTINST FORINST DOMINST Panel C: CEO and board characteristics FAMILYCEO DCS BOARDSIZE BUSYBOARD INDPDIR CEOAGE Panel D: Firm-specific variables SALES ADJRETURN INDADJROA MtoB STDDEVRET *  ***

Total sample (N = 3731)

Non-family firms (N = 2155)

Family firms (N = 1576)

Non-family versus family

Mean

Median

Mean

Median

Mean

Median

Mean

1596.908 1056.038 540.869 12.17

741.018 642.628 0.000 0.00

1713.642 1096.676 616.965 13.72

834.120 716.149 0.000 0.00

1437.287 1000.471 436.816 10.05

609.298 537.792 0.000 0.00

(2.44)*** (1.24) (2.49)*** (4.85)***

(8.22)*** (7.79)*** (6.19)*** (6.00)***

0.422 0.189 0.086 0.103

0.000 0.153 0.059 0.066

0.222 0.104 0.118

0.195 0.075 0.079

0.144 0.061 0.083

0.117 0.040 0.055

(16.0)*** (14.2)*** (8.67)***

(16.9)*** (14.1)*** (8.85)***

0.167 0.254 11.711 0.377 0.234 53.445

0.000 0.000 11.000 0.000 0.200 53.000

0.217 12.652 0.380 0.255 53.554

0.000 12.000 0.000 0.222 54.000

0.395 0.305 10.423 0.374 0.205 53.297

0.000 0.000 10.000 0.000 0.182 53.000

(6.12)*** (12.7)*** (0.32) (6.92)*** (0.96)

(6.09)*** (11.9)*** (0.33) (5.93)*** (1.50)

4,581,006 0.037 0.017 2.982 2.152

799,598 0.030 0.056 2.223 1.883

(8.29)*** (1.58)* (1.19) (3.94)*** (0.47)

(7.71)*** (2.41)*** (0.78) (3.53)*** (1.12)

6,787,812 0.047 0.027 2.808 2.143

1,173,625 0.046 0.054 2.134 1.875

8,401,699 0.054 0.034 2.681 2.136

1,609,000 0.063 0.051 2.072 1.868

Median

Statistical significance at the 10% level. Statistical significance at the 5% level. Statistical significance at the 1% level.

be a proxy for managerial entrenchment, experience with positive implications for firm performance, or a proxy for the length of time to retirement (Gibbons and Murphy, 1993; Linck et al., 2008; Fernandes et al., 2012). The last governance variable we consider is DCS, a binary variable that takes the value of 1 when the company has a dual class share structure. The dual class structure allows controlling shareholders to separate control from ownership, thereby effectively controlling the company with a lower percentage of cash flows rights. Dual class structures are common in Europe, especially in family firms (Faccio and Lang, 2002). Masulis et al. (2009) find that executives related to the controlling shareholder in DCS firms receive higher total compensation than those in firms with single class shares. This result can be interpreted as consistent with managerial power theory. Amoako-Adu et al. (2011) report that family members in executive positions in dual class companies have significantly higher remuneration than their counterparts in single class companies with concentrated control, which stem from larger bonuses and stock options. The authors interpret these results as being in line with the optimal contract theory of executive compensation: managers are paid more in dual class companies to prevent them from taking advantage of their higher voting control. Finally, we use firm-specific control variables (CONTROL VARIABLESit), including firm size, which is measured by the log of sales (LNSALES)27; growth opportunities, which is measured by the mar-

27 In an unreported analysis, we use the log of assets as a proxy for a firm’s size, as in Fernandes et al. (2012), and results are remarkably similar.

ket-to-book ratio (MtoB); and the volatility of stock returns, measured by the standard deviation of daily stock returns (STDDEVRET).28 MtoB is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. We expect a positive relationship between LNSALES and CEO compensation, since large firms are likely to have more complex business operations that would require higher-quality CEOs demanding higher compensation. Firms with higher growth opportunities would reward their CEOs with a higher level of compensation (Conyon et al., 2011; Fernandes et al., 2012).29 Following Linck et al. (2008), we use STDDEVRET to control for the value of the CEO’s firm-specific information. CEOs in firms with high volatility would have more firm-specific information than outsiders and would require higher equity-based compensation to align their interests with those of shareholders. Since the cost of monitoring increases as the information asymmetry between managers and shareholders increases, the cost of losing an informed CEO is higher than the cost of losing a CEO with no firm-specific information. Thus, we expect CEO compensation, particularly equity-based compensation, to be positively related to the standard deviation of stock returns.

28 In an unreported analysis, we also include dividends as a control variable to examine if there is a trade-off between CEO pay and dividends in family firms. We do not find that dividends significantly affect CEO compensation, and all other results remain the same. 29 Conyon et al. (2011) and Fernandes et al. (2012) use Tobin’s Q as a measure of growth opportunities. Our results do not change if we employ Tobin’s Q instead of market-to-book.

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Table 2 CEO compensation and institutional ownership across years. Panel A of this table reports descriptive statistics for the total compensation and components of compensation by year for Continental European firms’ CEOs. The sample period is from 2001 to 2008. TOTAL_C is the total compensation, CASH_C is the total cash compensation, and EQUITY_C is equity-linked compensation. EQUITY_RATIO is the ratio of equity-based compensation to total compensation. All compensation figures are in thousands of Euros. % EC is the percentage of firms that use equity-based compensation. Panel B reports the descriptive statistics for the percentage of shares held by total and foreign institutional owners at Western Continental European firms for the full sample, the subsamples of family (the firm’s controlling shareholder at the 10% level is a family) and non-family firms. Total Institutional Ownership (TOTINST) and Foreign Institutional Ownership (FORINST) are the total percentages of shares held by total and foreign financial institutions. Institutional owners are banks and trusts, insurance companies, investment advisors, pension funds, research firms, and sovereign wealth funds. We define an institutional investor as foreign if its country of origin is different from the country where the firm is located. TOTAL_C

Panel A: CEO compensation by year 2001 2002 2003 2004 2005 2006 2007 2008

Panel B: Institutional ownership by year 2001 2002 2003 2004 2005 2006 2007 2008 ***

CASH_C

EQUITY_C

EQUITY_RATIO

Obs.

Mean

Median

Mean

Median

Mean

Median

Mean

Median

% EC

210 325 390 428 531 581 633 633

1862.837 1547.373 1341.166 1330.457 1553.561 1797.314 1630.353 1690.817

588.707 616.244 617.516 673.434 661.658 809.202 850.447 861.830

760.122 1062.108 854.597 939.932 957.140 1052.289 1203.006 1293.145

538.587 531.245 549.244 582.602 579.658 691.315 753.974 780.140

1102.716 485.265 486.570 390.526 596.421 745.025 427.346 397.672

0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000

17.12 14.04 11.81 10.94 11.84 14.14 10.59 10.67

0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

30.00 32.92 29.49 29.44 28.06 30.64 26.86 30.65

Total Institutional Ownership (TOTINST)

Foreign Institutional Ownership (FORINST)

Obs.

Full sample

Family

Non-family

Full Sample

Family

Non-Family

210 325 390 428 531 581 633 633

20.54 17.26 16.90 16.58 16.82 18.01 21.79 21.61

16.39*** 13.79*** 12.63*** 12.95*** 12.64*** 13.32*** 16.21*** 16.50***

22.94 19.43 19.59 18.86 20.11 21.89 26.36 25.57

6.97 6.33 5.71 6.25 6.76 8.24 11.93 12.01

4.41*** 4.45*** 3.65*** 4.22*** 4.54*** 5.81*** 8.39*** 9.01***

8.45 7.50 7.01 7.52 8.51 10.25 14.83 14.33

Statistical significance at the 1% level for tests between family and non-family firms.

3.3. Sample characteristics We present descriptive statistics for our full sample, and the subsamples of family and non-family firms in Table 1. Our sample is fairly balanced between family and non-family firms. In fact, family firms represent 42.2% of our sample. All values are expressed in thousands of Euros.30 Pairwise correlations between all of the variables used in our empirical analysis are reported in Appendix A. Panel A of Table 1 presents the compensation variables. The average (median) CEO total compensation is €1.597 million (€741,018). Consistent with Fernandes et al. (2012), we observe that Continental European firms rely more on cash compensation than equity-based compensation. Over the period 2001–2008, average cash compensation is €1.056 million and average equitybased compensation is €540,870. Furthermore, on average, family firms offer less equity-based compensation than non-family firms. This finding is consistent with the view that family firms do not need equity-based compensation to align the incentives of their CEOs with those of shareholders. The average equity-based compensation is €436,816 for family firms and €616,965 for non-family firms. We observe that approximately 30% of the sample firms use equity-based compensation. We find that on average, family firms offer a significantly lower total compensation than non-family firms (€1.437 million versus €1.714 million, respectively). The median for CEO total compensation is €834,120 in non-family firms, while it is €609,298 in family firms. Panel B of Table 1 presents descriptive statistics for ownership variables. We observe that 42.2% of our sample firms have a family

30 Compensation and all monetary variables in levels (for example, sales) in nonEuro countries (Switzerland, Norway, Sweden, and Denmark) are converted into Euros.

as the controlling shareholder.31 We note that the average institutional ownership is 18.9%, which is significantly larger for non-family firms (22.2%) than for family firms (14.4%). This difference could be explained by the fact that family firms already have a large shareholder, the controlling family; thus, fewer shares are available for institutional investors. The average foreign institutional ownership is 8.6%, while the average domestic institutional ownership is 10.3%. Table 1 indicates that on average, both domestic and foreign institutional ownership are significantly larger in non-family firms than in family firms. This observation is consistent with the findings from Doidge et al. (2007) and Leuz et al. (2009) that US institutions invest less in firms with large block ownership by insiders (e.g., managers and families), since they view such firms as being potentially poorly governed. Further, Ferreira and Matos (2008) find that firm size is an important factor in institutional investment, since institutional investors have concerns about liquidity and transaction costs. Thus, given that family firms are relatively smaller in size, they might be of less interest to institutional investors.32 Panel C of Table 1 presents descriptive statistics for CEO and board characteristics. The CEO is a family member in 39.5% of family firms. Family firms have smaller board sizes than non-family

31 In family firms, the largest shareholder, who is directly or indirectly controlled by a controlling family, owns on average (median) 41.61% (41.83%) of the firm’s voting rights. 32 In an unreported analysis, we also use another measure of institutional ownership concentration: institutional blockholder ownership, which is defined as the percentage of equity owned by institutional investors with at least 5% of the firm’s outstanding shares. We find that institutional blockholders exist in 49.67% of firmyear observations. The average institutional blockholder ownership is 8.61%. At least one foreign institutional blockholder is present in 24% of firm-year observations, while 35% of firm-year observations have at least one domestic institutional blockholder. Since the results obtained using these definitions are similar to those obtained with TOTINST, FORINST, and DOMINST, we do not report them for the sake of brevity.

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Table 3 Family control, institutional ownership and CEO compensation. This table reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of cash compensation (CASH_C); and of the Tobit regressions for the ratio of equity-based compensation to the total compensation (EQUITY_RATIO). All regressions include country, industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. BOARDSIZE is the total number of executive and nonexecutive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by the local market return. INDADJROA is the industry-adjusted ratio of net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at the firm level are in brackets. TOTAL_C (1) CONSTANT FAMILY

3.354*** [0.577] 0.173*** [0.060]

BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adj. R square Observations * ** ***

3.255*** [0.594]

0.458*** [0.167] 0.040*** [0.009] 0.326*** [0.063] 0.455*** [0.162] 0.007* [0.004] 0.140** [0.071] 0.015 [0.051] 0.096* [0.056] 0.040*** [0.012] 0.059** [0.027] 0.257* [0.028]

0.214** [0.106] 0.518*** [0.170] 0.040*** [0.009] 0.319*** [0.063] 0.455*** [0.165] 0.007* [0.004] 0.123* [0.069] 0.021 [0.051] 0.100* [0.055] 0.039*** [0.012] 0.058** [0.027] 0.254*** [0.028]

0.43 3731

0.43 3731

FAMILYCEO TOTINST

CASH_C (2)

(3)

EQUITY_RATIO (4)

3.629*** [0.533] 0.148*** [0.055]

3.534*** [0.544]

(5)

(6)

3.653*** [0.013] 0.019** [0.009]

3.620*** [0.013]

0.367** [0.149] 0.036*** [0.009] 0.175*** [0.057] 0.242 [0.149] 0.003 [0.004] 0.121* [0.062] 0.024 [0.046] 0.061 [0.051] 0.031*** [0.011] 0.047* [0.025] 0.226*** [0.026]

0.142 [0.098] 0.428*** [0.153] 0.036*** [0.009] 0.170*** [0.057] 0.249* [0.151] 0.003 [0.004] 0.106* [0.061] 0.029 [0.046] 0.066 [0.051] 0.030*** [0.010] 0.046* [0.025] 0.225*** [0.026]

0.335*** [0.031] 0.009*** [0.001] 0.277*** [0.010] 0.419*** [0.023] 0.009*** [0.000] 0.006 [0.010] 0.013** [0.005] 0.040*** [0.006] 0.011*** [0.002] 0.017*** [0.004] 0.059*** [0.001]

0.116*** [0.009] 0.321*** [0.031] 0.009*** [0.001] 0.275*** [0.010] 0.407*** [0.023] 0.009*** [0.000] 0.008 [0.009] 0.014** [0.005] 0.038*** [0.006] 0.010*** [0.002] 0.016*** [0.004] 0.057*** [0.001]

0.415 3731

0.414 3731

0.223 3730

0.226 3730

Statistical significance at the 10% level. Statistical significance at the 5% level. Statistical significance at the 1% level.

firms: the average board size (BOARDSIZE) in our sample is 11.71. Overall, 37.7% of the boards are classified as busy in our sample firms, which is higher than the 21% reported by Fich and Shivdasani (2006) for their sample of US firms. Finally, we observe that on average, 23.4% of directors are independent. Further, family firms give fewer seats to independent directors on their boards. On average, 25.5% of directors are independent in non-family firms, while 20.5% are independent in family firms, with the difference being statistically significant. Finally, CEOs in family and non-family firms are similar in age. Concerning DCS, 30.5% of the observations classified as family firms have a dual class equity structure (480/1576); while 21.7% of the non-family firm observations exhibit a dual class equity structure (467/2155). The difference is statistically significant and is in line with the finding that family firms use more dual-class structures than non-family firms (Faccio and Lang, 2002). Panel D of Table 1 reports descriptive statistics for firm-specific financial variables. The comparison between family and non-family firms highlights the well-known characteristics of family firms: they are smaller in size, measured by total sales, than non-family firms. On average, family firms have a higher market-to-book ratio than non-family firms. However, the average adjusted return is higher for non-family firms than family firms. We do not find a sig-

nificant difference in the industry adjusted ROA and the standard deviation of stock returns between family and non-family firms. In Table 2, we present the descriptive statistics for total, cash, and equity-based compensation, and institutional ownership across years from 2001 to 2008.33 Panel A of Table 2 reports the descriptive statistics for the components of CEO compensation. We observe that during the sample period, the average cash compensation increased from €760,122 to €1.293 million, while the average equity-based compensation declined from €1.103 million to €397,672. However, the percentage of firms that use equity-based compensation remains constant and close to 30% throughout the sample period. Further, the median for total CEO compensation increased from €588,707 in 2001 to €861,830 in 2008, whereas the change in the average CEO total compensation from 2001 to 2008 seems relatively small (€132,020). Panel B of Table 2 reports the average total and foreign institutional ownership across years for our sample of family and nonfamily firms. The average total institutional ownership varies between 16.58% and 21.79% for our full sample over the period 2001–2008. Similar to Aggarwal et al. (2011), we observe that 33 The number of firms in our sample increases across years because of improved BoardEx coverage and changes in disclosure rules.

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Table 4 Family control, foreign and domestic institutional ownership, and CEO compensation. This table reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of cash compensation (CASH_C); and of the Tobit regressions for the ratio of equity-based compensation to the total compensation (EQUITY_RATIO). All regressions include country, industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. FORINST and DOMINST stand for foreign and domestic institutional ownership. BOARDSIZE is the total number of executive and nonexecutive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by the local market return. INDADJROA is the industry-adjusted ratio of net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of the daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at firm level are in brackets. TOTAL_C (1) CONSTANT FAMILY

3.428*** [0.575] 0.157*** [0.060]

DOMINST BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adj. R square Observations * ** ***

3.350*** [0.590]

1.347*** [0.259] 0.001 [0.179] 0.040*** [0.009] 0.312*** [0.062] 0.417*** [0.161] 0.007* [0.004] 0.145** [0.070] 0.016 [0.051] 0.083 [0.055] 0.038*** [0.012] 0.052* [0.027] 0.250*** [0.028]

0.215** [0.106] 1.452*** [0.260] 0.021 [0.178] 0.039*** [0.009] 0.304*** [0.063] 0.411** [0.164] 0.007* [0.004] 0.130* [0.068] 0.021 [0.051] 0.085 [0.054] 0.036*** [0.012] 0.050* [0.027] 0.247*** [0.028]

0.435 3731

0.435 3731

FAMILYCEO FORINST

CASH_C (2)

(3)

EQUITY_RATIO (4)

3.678*** [0.534] 0.138** [0.055]

3.598*** [0.544]

(5)

(6)

3.642*** [0.013] 0.016* [0.009]

3.605*** [0.013]

0.957*** [0.244] 0.056 [0.165] 0.036*** [0.008] 0.166*** [0.057] 0.218 [0.149] 0.003 [0.004] 0.124** [0.062] 0.024 [0.046] 0.052 [0.050] 0.029*** [0.011] 0.042* [0.025] 0.222*** [0.026]

0.143 [0.098] 1.059*** [0.248] 0.084 [0.165] 0.036*** [0.009] 0.160*** [0.057] 0.22 [0.151] 0.003 [0.004] 0.110* [0.061] 0.029 [0.046] 0.056 [0.050] 0.028*** [0.010] 0.041 [0.025] 0.220*** [0.026]

0.484*** [0.047] 0.246*** [0.035] 0.009*** [0.001] 0.274*** [0.010] 0.411*** [0.023] 0.009*** [0.000] 0.007 [0.010] 0.013** [0.005] 0.038*** [0.006] 0.010*** [0.002] 0.015*** [0.004] 0.058*** [0.001]

0.117*** [0.009] 0.477*** [0.048] 0.224*** [0.035] 0.009*** [0.001] 0.271*** [0.010] 0.397*** [0.023] 0.009*** [0.000] 0.009 [0.009] 0.013** [0.005] 0.035*** [0.006] 0.010*** [0.002] 0.015*** [0.004] 0.056*** [0.001]

0.417 3731

0.416 3731

0.224 3730

0.226 3730

Statistical significance at the 10% level. Statistical significance at the 5% level. Statistical significance at the 1% level.

the average foreign institutional ownership has grown considerably from 6.97% in 2001 to 12.01% in 2008, and accounts for more than half of the total institutional ownership. In family firms, the average foreign institutional ownership is 4.41% in 2001, which increases to 9.01% in 2008. The average foreign institutional ownership also increases in non-family firms from 8.45% in 2001 to 14.33% in 2008. Finally, we observe that the average total institutional ownership and foreign institutional ownership are lower in family firms than non-family firms over the sample period.

4. Estimation results 4.1. Do controlling family shareholders extract wealth through CEO compensation? We present our estimation results for total (TOTAL_C), cash (CASH_C) and the ratio of equity-based compensation to total compensation (EQUITY_RATIO) in Table 3. Looking at Columns 1 and 3, the coefficient estimates for family control are negative and significant, suggesting that CEOs in family firms receive lower compen-

sation than CEOs in non-family firms.34 Family firms rely less on equity-based compensation, as the negative coefficient in Column 5 shows. Furthermore, we investigate the impact of family CEOs on compensation by replacing the family dummy with the family CEO dummy in Columns 2, 4, and 6.35 The coefficient estimate for the family CEO dummy is negative and significant for the total compensation and the fraction of equity-based compensation, while it is negative, but not significant for cash compensation. Overall, we do not find any significant evidence of rent extracting by family CEOs providing higher compensation for themselves. The opposite seems, indeed, to be true: family firms pay less to their CEOs than non-family firms. In fact, we have some evidence that family CEOs receive relatively lower compensation than professional CEOs. This finding is consistent with the hypothesis that family ties can increase the

34 Results do not change if we use the percentage voting rights of the controlling family instead of the dummy FAMILY. 35 The correlation between the family dummy and the family CEO dummy is 0.52, which is considerably high and significant at the 1% level. Thus, we do not include both variables at the same time in our regression models in order to avoid a potential multicollinearity problem.

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Table 5 Interactions between family control and institutional ownership, and CEO compensation. This table reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of cash compensation (CASH_C); and of the Tobit regressions for the ratio of equity-based compensation to the total compensation (EQUITY_RATIO). All regressions include country, industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by local market return. INDADJROA is the industry-adjusted ratio of the net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of the daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at firm level are in brackets. TOTAL_C (1) CONSTANT FAMILY

3.437*** [0.581] 0.272*** [0.096]

FAMILYCEO TOTINST FAMILY ⁄ TOTINST

0.289 [0.194] 0.569* [0.345]

FAMILYCEO ⁄ TOTINST BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adj. R-square Observations * ** ***

CASH_C (2) 3.262*** [0.595]

0.312* [0.164] 0.466*** [0.172]

0.040 [0.009] 0.331*** [0.062] 0.454*** [0.162] 0.007* [0.004] 0.134* [0.071] 0.018 [0.051] 0.099* [0.056] 0.040*** [0.012] 0.058** [0.027] 0.255*** [0.028]

0.725 [0.705] 0.039*** [0.009] 0.319*** [0.063] 0.455*** [0.165] 0.007* [0.004] 0.120* [0.069] 0.024 [0.051] 0.101* [0.055] 0.038*** [0.012] 0.057** [0.026] 0.255*** [0.029]

0.431 3731

0.431 3731

***

(3)

EQUITY_RATIO (4)

3.737*** [0.535] 0.276*** [0.086]

0.148 [0.167] 0.740** [0.316]

3.539*** [0.545]

0.225 [0.155] 0.383** [0.153]

(5)

(6)

3.655*** [0.013] 0.008 [0.011]

3.620*** [0.013]

0.376*** [0.031] 0.156*** [0.044]

0.119*** [0.014] 0.320*** [0.031]

0.035 [0.008] 0.182*** [0.056] 0.242 [0.149] 0.003 [0.004] 0.113* [0.062] 0.028 [0.046] 0.064 [0.051] 0.031*** [0.011] 0.045* [0.025] 0.224*** [0.026]

0.613 [0.677] 0.036*** [0.009] 0.169*** [0.057] 0.250* [0.151] 0.003 [0.004] 0.103* [0.061] 0.032 [0.046] 0.066 [0.051] 0.029*** [0.010] 0.046* [0.024] 0.225*** [0.026]

0.010 [0.001] 0.276*** [0.010] 0.419*** [0.023] 0.009*** [0.000] 0.007 [0.010] 0.013** [0.005] 0.040*** [0.005] 0.011*** [0.002] 0.017*** [0.004] 0.060*** [0.001]

0.019 [0.080] 0.009*** [0.001] 0.275*** [0.010] 0.407*** [0.023] 0.009*** [0.000] 0.008 [0.009] 0.014** [0.005] 0.038*** [0.006] 0.010*** [0.002] 0.016*** [0.004] 0.057*** [0.001]

0.417 3731

0.414 3731

0.223 3730

0.226 3730

***

***

Statistical significance at the 10% level. Statistical significance at the 5% level. Statistical significance at the 1% level.

CEO’s commitment to the firm. Thus, a family CEO would be less likely to leave the firm for another company and would be more prone to accept lower pay. Total institutional ownership has a positive and significant impact on the level of CEO compensation. This finding is contrary to the results from Hartzell and Starks (2003) and Ozkan (2011), who find that institutional ownership has a negative and significant impact on CEO compensation in the US and the UK, respectively, but it is consistent with Fernandes et al. (2012). Our results could be interpreted as suggesting that, despite institutional investors’ increasing ownership in Continental European firms, they do not provide monitoring for CEO compensation by checking it more circumspectly. However, Table 3 also documents a positive relationship between the equity ratio and institutional investor ownership, which is similar to what Fernandes et al. (2012) find in their sample of US and non-US companies. Our findings of institutional investors having a positive impact on the level of CEO total compensation and the fraction of equity-based compensation are consistent with those of Fernandes et al. (2012). We can interpret this finding as the following: CEOs receiving a lar-

ger fraction of their compensation in the form of equity-based compensation would need to receive a higher level of total compensation for accepting more risk. We observe that the relationship between board size and CEO compensation is positive and significant. This finding supports the argument that larger boards can have problems with coordination, communication and monitoring the management, which can lead to higher CEO compensation. For our sample of Continental European firms, larger boards seem to be less effective in providing monitoring for CEO compensation packages. Furthermore, we find a positive and significant relation between the proportion of independent directors and CEO compensation level; that is, firms with a higher proportion of independent directors offer a higher level of CEO compensation, a result in line with that of Fernandes et al. (2012) and Ozkan (2011). We also observe that independent directors push for a higher equity ratio, which can explain their positive impact on total CEO compensation. Further, we find that firms with busy boards offer a higher level of CEO total and cash compensation and have a higher fraction of equity-based compensation, indicating that busy boards may tend to rely more on equity-based

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Table 6 The role of institutional ownership in family and non-family firms. This table reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of cash compensation (CASH_C); and of the Tobit regressions for the ratio of equity-based compensation to total compensation (EQUITY_RATIO). All regressions include country, industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. BOARDSIZE is the total number of executive and nonexecutive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by the local market return. INDADJROA is the industry-adjusted ratio of net income to total assets. MtoB, Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at the firm level are in brackets. TOTAL_C Family Panel A: Family versus non-family firms Constant TOTINST BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adjusted R-sq. Observations

TOTINST BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adjusted R-sq. Observations *

Statistical significance at the 10% level. Statistical significance at the 5% level. *** Statistical significance at the 1% level. **

EQUITY_RATIO

Family

Non-family

Family

Non-family

3.749*** [0.802] 0.719** [0.323] 0.073*** [0.016] 0.302*** [0.113] 0.287 [0.295] 0.006 [0.006] 0.137 [0.115] 0.084 [0.080] 0.07 [0.087] 0.046** [0.018] 0.027 [0.043] 0.198*** [0.049]

3.680*** [0.605] 0.301 [0.204] 0.013 [0.009] 0.294*** [0.066] 0.459** [0.178] 0.008* [0.005] 0.063 [0.084] 0.07 [0.065] 0.138** [0.062] 0.028* [0.016] 0.053* [0.032] 0.311*** [0.026]

4.025*** [0.766] 0.772*** [0.298] 0.064*** [0.016] 0.174 [0.106] 0.082 [0.277] 0.004 [0.006] 0.09 [0.104] 0.048 [0.073] 0.057 [0.080] 0.037** [0.017] 0 [0.040] 0.185*** [0.047]

3.941*** [0.589] 0.168 [0.172] 0.015* [0.008] 0.157*** [0.057] 0.247 [0.157] 0.002 [0.004] 0.066 [0.070] 0.05 [0.060] 0.084 [0.054] 0.018 [0.014] 0.056* [0.029] 0.257*** [0.022]

3.899*** [0.021] 0.181*** [0.066] 0.027*** [0.001] 0.322*** [0.017] 0.637*** [0.042] 0.007*** [0.000] 0.087*** [0.016] 0.059*** [0.009] 0.007 [0.015] 0.021*** [0.003] 0.007 [0.007] 0.034*** [0.001]

1.094*** [0.014] 0.373*** [0.034] 0.005*** [0.001] 0.216*** [0.012] 0.295*** [0.025] 0.011*** [0.000] 0.043*** [0.011] 0.040*** [0.007] 0.065*** [0.006] 0.011*** [0.003] 0.002 [0.005] 0.099*** [0.001]

0.407 1576

0.472 2155

0.408 1576

0.449 2155

0.243 1575

0.257 2155

CASH_C Family CEO

Prof. CEO

EQUITY_RATIO Family CEO

Prof. CEO

6.741*** [1.598] 0.901 [0.712] 0.087*** [0.029] 0.031 [0.223] 0.202 [0.549] 0.001 [0.012] 0.144 [0.290] 0.127 [0.131] 0.096 [0.108] 0.043 [0.027] 0.062 [0.069] 0.142* [0.075] 0.321 623

5.066*** [0.960] 0.582* [0.336] 0.055** [0.022] 0.297** [0.123] 0.223 [0.314] 0.008 [0.006] 0.099 [0.112] 0.016 [0.080] 0.123 [0.111] 0.024 [0.021] 0.073 [0.047] 0.179*** [0.063] 0.487 953

3.440*** [0.031] 0.453*** [0.122] 0.034*** [0.003] 0.400*** [0.028] 1.109*** [0.069] 0.009*** [0.001] 0.162*** [0.029] 0.233*** [0.015] 0.054*** [0.017] 0.033*** [0.005] 0.085*** [0.011] 0.040*** [0.002] 0.477 623

3.804*** [0.022] 0.316*** [0.066] 0.020*** [0.001] 0.271*** [0.018] 0.535*** [0.044] 0.005*** [0.000] 0.120*** [0.016] 0.076*** [0.009] 0.079*** [0.017] 0.022*** [0.004] 0.041*** [0.008] 0.026*** [0.001] 0.255 952

TOTAL_C Family CEO Panel B: Family CEOs versus professional CEOs in family firms Constant

CASH_C Non-family

6.484*** [1.657] 1.116 [0.770] 0.096*** [0.030] 0.149 [0.231] 0.023 [0.579] 0.002 [0.012] 0.137 [0.316] 0.184 [0.133] 0.069 [0.130] 0.048* [0.027] 0.07 [0.076] 0.162** [0.079] 0.342 623

Prof. CEO

4.877*** [0.971] 0.554 [0.347] 0.061*** [0.022] 0.411*** [0.128] 0.426 [0.333] 0.01 [0.007] 0.168 [0.124] 0.073 [0.094] 0.116 [0.120] 0.036 [0.025] 0.04 [0.054] 0.185*** [0.063] 0.464 953

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Table 7 Family control, institutional ownership and CEO excess compensation. This table reports the estimates of the OLS regressions for excess total compensations (Excess TOTAL_C); excess cash compensation (Excess CASH_C), and the excess ratio of equity-based compensation to total compensation (Excess EQUITY_RATIO). Excess compensation (equity ratio) is the actual compensation (equity ratio) minus the predicted value. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. FORINST and DOMINST stand for foreign and domestic institutional ownership. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. STDDEVRET is the annual standard deviation of daily stock returns. All regressions include country, industry and year fixed effects. To estimate the predicted compensation, where the number of observations allowed us, we run these regressions at the country level controlling the year and industry fixed effects and clustering standard errors at the firm level. Due to limited observations, country-level regressions are not possible for Austria, Denmark, Finland, Greece and Portugal. We use the full sample of companies from those countries to estimate predicted compensations (equity ratios) in these countries. The regressions for the predicted total, cash, and equity compensations involve the following variables: CEO Age; DCS, which is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t; ADJRETURN, which represents the annual stock return adjusted by the local market return; INDADJROA, which is the industry-adjusted ratio of the net income to total assets; MtoB, which is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity; LNSALES is the natural logarithm of sales. All of the independent variables are lagged with respect to compensation. Robust standard errors clustered at the firm level are in brackets. Excess TOTAL_C Panel A: Family control and total institutional ownership CONSTANT FAMILY

4.230*** [0.479] 0.026 [0.099]

FAMILYCEO TOTINST BOARDSIZE BUSYBOARD INDPDIR STDDEVRET

Adj. R square Observations Panel B: Family control and foreign and domestic institutional ownership CONSTANT FAMILY

DOMINST BOARDSIZE BUSYBOARD INDPDIR STDDEVRET Adj. R square Observations

4.274*** [0.475]

1.032*** [0.259] 0.031*** [0.009] 0.281*** [0.084] 0.872*** [0.253] 0.265*** [0.068]

0.108 [0.129] 0.992*** [0.262] 0.029*** [0.010] 0.278*** [0.085] 0.850*** [0.256] 0.266*** [0.068]

0.492 3731

4.223*** [0.480] 0.032 [0.099]

FAMILYCEO FORINST

Excess CASH_C

1.361*** [0.389] 0.845*** [0.317] 0.030*** [0.009] 0.273*** [0.084] 0.859*** [0.255] 0.268*** [0.068] 0.492 3731

3.668*** [0.347] 0.067 [0.066]

Excess EQUITY_RATIO

3.629*** [0.345]

0.222* [0.115] 0.037 [0.024]

0.255** [0.112]

0.561*** [0.175] 0.029*** [0.007] 0.137** [0.062] 0.355** [0.171] 0.000 [0.033]

0.115 [0.105] 0.575*** [0.179] 0.028*** [0.007] 0.132** [0.063] 0.350** [0.173] 0.001 [0.033]

0.231*** [0.065] 0.002 [0.002] 0.088*** [0.019] 0.256*** [0.060] 0.116*** [0.019]

0.002 [0.024] 0.207*** [0.065] 0.001 [0.002] 0.089*** [0.020] 0.249*** [0.060] 0.116*** [0.019]

0.492 3731

0.599 3731

0.599 3731

0.207 3730

0.205 3730

4.272*** [0.475]

3.661*** [0.348] 0.061 [0.066]

3.628*** [0.346]

0.221* [0.115] 0.037 [0.025]

0.255** [0.112]

0.108 [0.129] 1.306*** [0.386] 0.807** [0.322] 0.028*** [0.010] 0.271*** [0.085] 0.836*** [0.258] 0.269*** [0.068] 0.492 3731

0.901*** [0.289] 0.368* [0.204] 0.029*** [0.007] 0.129** [0.062] 0.341** [0.172] 0.004 [0.034] 0.599 3731

0.115 [0.105] 0.932*** [0.291] 0.369* [0.206] 0.028*** [0.007] 0.124** [0.063] 0.334* [0.174] 0.004 [0.034] 0.599 3731

0.239** [0.099] 0.225*** [0.085] 0.002 [0.002] 0.088*** [0.019] 0.256*** [0.060] 0.116*** [0.019] 0.207 3730

0.002 [0.024] 0.203** [0.097] 0.208** [0.084] 0.001 [0.002] 0.089*** [0.020] 0.249*** [0.061] 0.116*** [0.019] 0.205 3730

*

Statistical significance at the 10% level. Statistical significance at the 5% level. *** Statistical significance at the 1% level. **

compensation to overcome their ineffective monitoring, possibly caused by their busy schedules. Furthermore, the coefficient estimate for CEO age is negative and significant in the total compensation and equity ratio regression, suggesting that older CEOs are less inclined to accept more risk. Consistent with the literature (Masulis et al., 2009; Amoako-Adu et al., 2011), we find that DCS has a positive and significant impact on total and cash compensation, indicating that firms with a dual class equity structure pay more to their CEOs. However, we do not observe that DCS affects the equity ratio.

Firm performance, measured by market adjusted stock return, does not have any significant impact on CEO compensation. This finding is contrary to the results from prior studies reporting a positive and significant impact of stock returns on CEO compensation for US and UK firms (Hartzell and Starks, 2003; Ozkan, 2011). We also observe that the coefficient estimate for the industry-adjusted ROA, the accounting-based measure of firm performance, is negatively related to the equity ratio. Similarly to the previous literature, market-to-book ratio, which is also a measure of growth opportunities, has a positive and significant impact on CEO com-

3330

E. Croci et al. / Journal of Banking & Finance 36 (2012) 3318–3335

Table 8 Interactions between family control, institutional ownership and return, and CEO compensation. This table reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of the cash compensation (CASH_C). All regressions include country, industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by local market return. INDADJROA is the industryadjusted ratio of the net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at the firm level are in brackets. TOTAL_C (1) CONSTANT FAMILY

***

3.350 [0.578] 0.170*** [0.060]

FAMILYCEO TOTINST FAMILY  ADJRETURN

0.442*** [0.165] 0.048 [0.100]

FAMILYCEO  ADJRETURN TOTINST  ADJRETURN BOARDSIZE BUSYBOARD INDPDIR CEOAGE DCS ADJRETURN INDADJROA MtoB STDDEVRET LNSALES Adj. R-square Observations * ** ***

CASH_C (2)

(3) ***

3.249 [0.593]

0.207** [0.105] 0.502*** [0.169]

(4) ***

3.628 [0.533] 0.147*** [0.055]

0.359** [0.148] 0.008 [0.092]

3.530*** [0.544]

0.137 [0.097] 0.419*** [0.152]

0.394 [0.308] 0.040*** [0.009] 0.326*** [0.062] 0.456*** [0.162] 0.007* [0.004] 0.140** [0.071] 0.032 [0.090] 0.096* [0.056] 0.040*** [0.012] 0.061** [0.027] 0.257*** [0.028]

0.135 [0.137] 0.386 [0.307] 0.040*** [0.009] 0.320*** [0.063] 0.455*** [0.165] 0.007* [0.004] 0.122* [0.069] 0.023 [0.081] 0.100* [0.055] 0.039*** [0.012] 0.060** [0.027] 0.254*** [0.028]

0.207 [0.274] 0.036*** [0.009] 0.175*** [0.057] 0.243 [0.149] 0.003 [0.004] 0.121* [0.062] 0.009 [0.081] 0.06 [0.051] 0.031*** [0.011] 0.048* [0.025] 0.226*** [0.026]

0.104 [0.132] 0.19 [0.272] 0.036*** [0.009] 0.170*** [0.057] 0.249* [0.151] 0.003 [0.004] 0.105* [0.061] 0.014 [0.072] 0.066 [0.051] 0.030*** [0.011] 0.047* [0.025] 0.225*** [0.026]

0.43 3731

0.43 3731

0.415 3731

0.413 3731

Statistical significance at the 10% level. Statistical significance at the 5% level. Statistical significance at the 1% level.

pensation and the equity ratio. We also find that the information asymmetry between CEO and outside investors, measured by STDDEVRET, has a positive impact on CEO compensation. CEOs with an informational advantage are, indeed, able to entrench themselves and obtain higher compensation, especially in the form of equity compensation. Finally, we find that firm size, measured by the log of sales, has a positive and significant impact on the level of CEO compensation, as well as on the equity ratio. Overall, the results suggest that family firms offer lower remuneration to their CEOs than non-family firms. We also find evidence that family CEOs receive lower compensation than

professional CEOs in family firms. Thus, our findings suggest that controlling family shareholders do not expropriate wealth from minority shareholders by offering higher compensation to their CEOs. We also observe that family CEOs receive a lower fraction of equity-based compensation. We find that institutional ownership has a positive effect on the level of CEO compensation and on the equity ratio. Thus, institutional investors do not seem to provide monitoring for the level of CEO compensation. However, institutional ownership has a positive impact on the equity fraction of CEO compensation, suggesting that institutional investors attempt to align the interests of CEOs with those of shareholders by offering CEOs more equity-based compensation. 4.2. Do institutional investors influence the level of CEO compensation in family firms? The aim of this section is to investigate the role of institutional investors in determining CEO compensation packages in family firms. Previous studies report that institutional investors can play an important role in reducing excessive levels of CEO compensation. However, there has been no evidence on how institutional investors influence CEO compensation in firms with controlling family shareholders. Recent literature (Ferreira and Matos, 2008; Ferreira et al., 2010) has stressed the difference between foreign institutional investors and domestic institutional investors in the way they play an active monitoring role in corporate decisionmaking. In Table 4, we examine whether the institutional investor’s nationality matters in setting CEO compensation. Our results show that the impact of institutional investors on CEO compensation varies, depending on whether they are foreign or domestic. We observe that foreign institutional ownership has a positive and significant impact on total and cash compensation, and on the equityratio regression. This finding suggests that, contrary to some anecdotal evidence, foreign institutional investors do not seem to take an active approach toward monitoring the level of CEO compensation. However, in light of the results of Fernandes et al. (2012), these results can be interpreted as an attempt by these foreign institutional investors, thanks to their positive and significant impact on equity-based compensation, to link CEO compensation to firm performance. As a riskier proposition, this compensation package must be larger than a pure cash compensation package. We also find that domestic institutional ownership affects the fraction of equity-based compensation positively, which might reflect those investors’ attempt to link CEO pay with performance. The results for family control dummies and other control variables are similar to those presented in Table 3. In Table 5, we investigate whether institutional investors can interact with family owners and determine CEO compensation. Thus, we include an interaction term, FAMILY  TOTINST, in our regression model. The coefficient for the interaction term between family and institutional ownership for total and cash compensation, FAMILY  TOTINST, is positive and significant, which indicates that institutional ownership has a positive impact on CEO pay in family firms. While this finding is inconsistent with the US (Hartzell and Starks, 2003) and UK (Ozkan, 2011) studies, it is in line with the finding of a cross-country study by Fernandes et al. (2012). Further, we find a negative and significant coefficient for FAMILY  TOTINST in the EQUITY_RATIO regression. Thus, institutional investors seem to lower the fraction of equity-based compensation in family firms. We interpret this evidence as consistent with the view that institutional investors do not want to give more power (i.e., voting rights) to the controlling family shareholders. On the other hand, the interaction between FAMILYCEO and TOTINST (FAMILYCEO  TOTINST) is never significant, suggesting that institutional investors do not tend to intervene in determining CEO com-

Table 9 Country-level analysis. Panel A of this table reports the descriptive statistics for the total compensation and components of compensation by country for Continental European firms’ CEOs. The sample period is from 2001 to 2008. TOTAL_C is the total compensation, CASH_C is the total cash compensation, and EQUITY_C is equity-linked compensation. EQUITY_RATIO is the ratio of equity- based compensation to total compensation. All compensation figures are in thousands of Euros.% EC is the percentage of firms that use equity-based compensation. Panel B reports the estimates of the OLS regressions for the natural logarithm of the total compensation (TOTAL_C); for the natural logarithm of cash compensation (CASH_C); and of Tobit regressions for the ratio of equity- based compensation to total compensation (EQUITY_RATIO). All regressions include industry and year fixed effects. The ownership and financial variables are lagged with respect to the dependent variable. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder is a family. TOTINST is the sum of the percentage of stakes held by institutional investors in a given company. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. CEOAGE is the age of the CEO. DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t. ADJRETURN represents the annual stock return adjusted by the local market return. INDADJROA is the industry- adjusted ratio of net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of the daily stock returns. LNSALES is the natural logarithm of sales. Robust standard errors clustered at the firm level are in brackets. Firms

Total

TOTAL_C

CASH_C

Mean

Median

Mean

Median

Mean

Median

1133.291 731.522 904.819 1629.838 883.932 1614.259 743.804 1705.660 834.090 384.391 9660.603 825.653 638.427 1683.717

991.446 528.310 920.725 1154.132 563.245 1225.350 422.776 959.279 630.147 243.438 736.572 253.017 426.084 1194.838

211.017 191.801 301.676 1107.963 740.515 445.196 0.000 889.729 459.418 105.008 54.975 100.328 32.685 1667.524

95.305 0.000 211.384 0.000 0.000 0.000 0.000 0.000 65.286 0.000 0.000 0.000 0.000 0.000

1056.038

642.628

540.870

0.000

4 42 6 9 209 114 4 72 82 29 5 29 104 45

19 145 26 43 1226 437 12 380 511 93 13 128 570 128

1344.308 923.322 1206.494 2737.801 1624.448 2059.455 743.804 2595.389 1293.508 489.399 9715.579 925.980 671.112 3351.240

1265.715 550.046 1095.621 1236.339 645.424 1414.532 422.776 1113.707 800.954 244.111 1027.512 309.186 441.241 1311.444

754

3731

1596.908

741.019

TOTAL_C France Panel B: Multivariate regressions for France, Germany, the Netherlands, and Sweden CONSTANT FAMILY TOTINST BOARDSIZE BUSYBOARD INDPDIR DCS CEOAGE ADJRETURN INDADJROA MtoB

3.916*** [0.821] 0.300*** [0.115] 0.954*** [0.323] 0.066*** [0.020] 0.507*** [0.119] 0.438 [0.298] 0.215 [0.142] 0.008 [0.007] 0.084 [0.092] 0.461** [0.219] 0.044** [0.022]

EQUITY_C

CASH_C Germany

2.955*** [0.966] 0.186 [0.128] 0.573 [0.364] 0.022 [0.019] 0.309** [0.121] 0.118 [0.363] 0.234 [0.155] 0.006 [0.007] 0.064 [0.151] 0.339 [0.686] 0.053* [0.031]

Neth.

3.532*** [0.833] 0.265** [0.127] 0.306 [0.344] 0.085** [0.034] 0.295*** [0.106] 0.835*** [0.271] 0.137 [0.181] 0.013** [0.006] 0.034 [0.105] 0.173 [0.285] 0.03 [0.021]

Sweden

2.307*** [0.473] 0.001 [0.082] 0.039 [0.237] 0.035 [0.024] 0.151 [0.095] 0.351* [0.188] 0.03 [0.091] 0.005 [0.006] 0.166** [0.083] 0.152*** [0.051] 0.013 [0.021]

France

3.957*** [0.747] 0.240** [0.108] 0.892*** [0.296] 0.061*** [0.018] 0.218** [0.107] 0.174 [0.274] 0.094 [0.128] 0.005 [0.007] 0.074 [0.082] 0.446** [0.204] 0.034* [0.019]

EQUITY_RATIO Germany

3.170*** [0.809] 0.125 [0.120] 0.579* [0.328] 0.02 [0.017] 0.119 [0.113] 0.113 [0.311] 0.16 [0.144] 0.009 [0.007] 0.047 [0.140] 0.525 [0.492] 0.045* [0.025]

Neth.

4.193*** [0.779] 0.213* [0.111] 0.154 [0.273] 0.062* [0.031] 0.268*** [0.085] 0.810*** [0.219] 0.21 [0.171] 0.005 [0.005] 0.018 [0.075] 0.127 [0.213] 0.026* [0.015]

Sweden

2.225*** [0.447] 0.05 [0.075] 0.023 [0.225] 0.029 [0.023] 0.139 [0.086] 0.292 [0.183] 0.057 [0.089] 0.003 [0.005] 0.146* [0.077] 0.144*** [0.049] 0.014 [0.020]

France

Germany

Neth.

Sweden

3.220*** [0.018] 0.082*** [0.014] 0.256*** [0.043] 0.020*** [0.001] 0.391*** [0.015] 0.683*** [0.036] 0.168*** [0.014] 0.012*** [0.000] 0.025*** [0.009] 0.041 [0.056] 0.024*** [0.003]

1.176** [0.493] 0.146** [0.061] 0.001 [0.237] 0.003 [0.009] 0.282*** [0.082] 0.218 [0.226] 0.03 [0.085] 0.003 [0.005] 0.038 [0.073] 0.024 [0.434] 0.017 [0.015]

0.956*** [0.367] 0.042 [0.071] 0.351** [0.174] 0.026*** [0.010] 0.081* [0.045] 0.056 [0.127] 0.211*** [0.075] 0.006* [0.004] 0.048 [0.056] 0.069 [0.107] 0.001 [0.008]

2.564*** [0.029] 0.149*** [0.023] 0.236*** [0.053] 0.014*** [0.002] 0.003 [0.023] 0.224*** [0.061] 0.300*** [0.023] 0.011*** [0.001] 0.121*** [0.023] 0.041*** [0.012] 0.073*** [0.008]

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(continued on next page)

E. Croci et al. / Journal of Banking & Finance 36 (2012) 3318–3335

Panel A: Descriptive statistics—CEO compensation by country Austria Belgium Denmark Finland France Germany Greece Italy Netherlands Norway Portugal Spain Sweden Switzerland

Obs.

E. Croci et al. / Journal of Banking & Finance 36 (2012) 3318–3335

0.549 511

0.619 570

0.282 1226

0.292 437

0.47 511

0.371 570

pensation in family firms if the CEO is a member of the controlling family. In Table 6, we take a closer look at the role of institutional investors in determining CEO compensation in family and nonfamily firms (Panel A), and in family firms led by a family CEO and family firms led by a professional CEO (Panel B). Consistent with the results of Table 5, where we use an interaction variable between a dummy for family control and institutional ownership, we report in Panel A that higher institutional ownership is associated with higher total and cash compensation in family firms, but not in non-family firms. We observe that institutional investors are in favor of increasing the fraction of equity-based compensation, both in family and non-family firms. However, as indicated by the significant coefficient of the interaction variable in Table 5, the impact of institutional ownership on the fraction of equitybased compensation is less in family firms than in non-family firms. In equity-ratio regressions, the coefficient estimate for DCS is positive for family firms, while it is negative for non-family firms. Thus, family firms tend to use more equity compensation when they can have an opportunity to offer a possibly inferior share to the CEO. In Panel B, we split family firms into two groups: family firms with a family CEO and family firms with a professional (i.e., non-family) CEO. While we find that institutional ownership does not have a significant impact on the level of CEO cash and total compensation, it does have a significant impact on the fraction of equity-based compensation for both family and professional CEOs in family firms. Having a dual class share structure also seems to have a positive impact on the fraction of equity-based compensation in family firms with professional CEOs, while it has a negative impact on CEO compensation in family firms with family CEOs.

4.3. Do families and institutional investors affect excess CEO compensation?

0.416 1226 Statistical significance at the 10% level. Statistical significance at the 5% level. *** Statistical significance at the 1% level. **

*

0.503 437 Adj. R square Observations

0.463 1226

0.547 511

0.584 570

0.514 6437

0.072* 0.019*** [0.040] [0.006] 0.292*** 0.040*** [0.028] [0.001] LNSALES

Mean

0.007 [0.047] 0.145** [0.071] 0.075 [0.058] 0.201*** [0.059] 0.083* [0.044] 0.157*** [0.051] 0.071 [0.046] 0.286*** [0.030]

Mean Mean

0.063 [0.055] 0.201*** [0.074] 0.003 [0.077] 0.229*** [0.068] 0.071 [0.047] 0.173*** [0.057] STDDEVRET

Table 9 (continued)

Firms

Obs.

TOTAL_C

Median

CASH_C

Median

EQUITY_C

Median

0.106** [0.050] 0.055* [0.033]

0.021 [0.028] 0.042** [0.021]

0.031*** [0.009] 0.040*** [0.002]

3332

Overall, the evidence presented so far show how family control and institutional ownership affect the level of total and cash compensation, as well as the proportion of equity-based compensation. In this section, we follow Core et al. (1999) and Ertimur et al. (2011), and decompose the compensation into two components: a predicted component based on economic determinants, and a residual component, the so-called ‘‘excess pay.’’ We then regress this excess pay (or excess equity ratio) on the family control and institutional ownership variables in order to determine their effect.36 Table 7 presents the results of the regression of excess CEO compensation on family and institutional investors variables, as well as on some firm-specific control variables. In Table 7, we observe that the effect of family control is not associated with excess compensation. However, the results shown in Panel A of Table 7 confirm the positive effect of institutional investors on total and cash compensation and on the equity ratio. In Panel B of Table 7, we classify institutional investors into two groups: domestic and foreigner institutional investors. While both domestic and foreign institutional ownership have a positive and significant impact on the excess total, cash compensation and equity-based fraction of compensation, the impact of foreign institu36 CEO Compensation is regressed on CEO tenure, CEO experience, CEO age, the market-adjusted stock market performance, the industry adjusted ROA, the firm’s market-to-book, and finally a proxy for size (i.e., the log of sales). All of the independent variables are lagged with respect to compensation. Where the number of observations allows us, we run this regression at the country level, controlling the year and industry fixed effects and clustering standard errors at the firm level. Due to limited observations, country-level regressions are not possible for Austria, Denmark, Finland, Greece and Portugal. We use the full sample of European companies to estimate the predicted compensation in these countries.

Appendix A. Correlation matrix The table presents the pairwise correlations between the variables used in the regression analysis. The sample period is from 2001 to 2008. TOTAL_C is the total compensation. CASH_C is the total cash compensation, which is composed of salary and bonuses. EQUITY_C is equity-linked compensation, which is composed of shares, options, and long-term investment plans. EQUITY_RATIO is the ratio of equity-based compensation to total compensation. FAMILY is a dummy variable that takes the value of 1 when the controlling shareholder at the 10% level is a family. FAMILYCEO is a dummy variable that takes the value of 1 when a family member is the CEO in a family firm. TOTINST is the total percentage of shares held by financial institutions. FORINST and DOMINST stand for foreign and domestic institutional ownership. BOARDSIZE is the total number of executive and non-executive directors. BUSYBOARD is a dummy variable that equals one if is the board is defined as busy, which occurs when 50% or more of the board’s outside directors hold three or more directorships in other quoted companies. INDPDIR is the ratio of independent non-executive directors to board size. ADJRETURN represents annual stock return adjusted by local market return. INDADJROA is the industry-adjusted ratio of net income to total assets. MtoB, the Market-to-Book ratio, is the ratio of the market value of shareholders’ equity to the book value of shareholders’ equity. STDDEVRET is the annual standard deviation of daily stock returns. LNSALES is the log of total sales (in thousands of Euros). DCS is a binary variable that takes the value of 1 if the firm has a dual class equity structure in year t.

TOTAL_C CASH_C EQUITY_RATIO FAMILY FAMILYCEO TOTINST FORINST DOMINST BOARDSIZE BUSYBOARD INDPDIR CEOAGE ADJRETURN INDADJROA MtoB STDDEVRET LNSALES DCS *

1 0.94* 0.52* 0.15* 0.18* 0.15* 0.28* 0.02 0.42* 0.26* 0.04* 0.10* 0.00 0.03 0.01 0.16* 0.54* 0.12*

1 0.23* 0.15* 0.17* 0.15* 0.26* 0.01 0.44* 0.21* 0.01 0.12* 0.00 0.04* 0.02 0.17* 0.53* 0.12*

1 0.08* 0.11* 0.08* 0.18* 0.03 0.12* 0.25* 0.12* 0.01 0.00 0.04 0.03 0.03 0.25* 0.02

1 0.52* 0.25* 0.23* 0.14* 0.20* 0.01 0.11* 0.02 0.03 0.02 0.06* 0.01 0.11* 0.10*

1 0.18* 0.13* 0.11* 0.24* 0.05* 0.07* 0.03 0.01 0.01 0.03 0.01 0.15* 0.03

1 0.58* 0.79* 0.12* 0.10* 0.10* 0.03 0.02 0.13* 0.02 0.04* 0.11* 0.05*

1 0.04 0.13* 0.11* 0.16* 0.03 0.05* 0.01 0.07* 0.06* 0.22* 0.05*

1 0.05* 0.03 0.00 0.06* 0.01 0.15* 0.04 0.01 0.02 0.10*

1 0.09* 1 0.15* 0.08* 1 0.17* 0.09* 0.05* 0.01 0.02 0.03 0.03 0.04 0.06* * * 0.13 0.05 0.01 0.24* 0.09* 0.10* 0.60* 0.31* 0.01 0.10* 0.08* 0.01

1 0.03 1 0.03 0.21⁄ * 0.05 0.12* 0.20* 0.18* 0.26* 0.01 0.01 0.02

1 0.03 0.25* 0.13* 0.09*

STDDEVRET LNSALES DCS

1 0.17* 1 0.12* 0.34* 0.05* 0.02

1 0.16*

E. Croci et al. / Journal of Banking & Finance 36 (2012) 3318–3335

TOTAL_ CASH_ EQUITY_ FAMILY FAMILYCEO TOTINST FORINST DOMINST BOARD BUSY INDPDIR CEOAGE ADJRETURN INDADJROA MtoB C C RATIO SIZE BOARD

1

Statistical significance at the 5% level.

3333

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E. Croci et al. / Journal of Banking & Finance 36 (2012) 3318–3335

tional ownership is more accentuated, in particular in the excess total and cash compensation regression. 4.4. Does family control influence CEO pay-for-performance sensitivity? In Table 8, we consider the interaction of family control with a firm’s stock price performance to investigate the CEO pay-for-performance link in firms with a controlling family shareholder. A close link between CEO pay and performance can help align the interests of CEOs with those of the shareholders and act as a disciplinary force for CEOs to make decisions in the best interests of shareholders, thus reducing potential CEO entrenchment. In firms with a controlling family shareholder, CEO entrenchment can be minimal, since these family shareholders would have incentives to provide monitoring to minimize managerial entrenchment. Consequently, those firms with family control are likely to have less need to have a close link between CEO pay and performance as a disciplinary mechanism for reducing managerial entrenchment. Our findings show that family control does not have a significant impact on the CEO pay-for-performance link. The coefficient estimate for the interaction term, FAMILY  ADJRETURN, is always insignificant for the CEO total and cash compensation.37 We also examine the interaction term between institutional ownership and firm performance. Table 8 shows that the interaction between institutional ownership and ADJRETURN is not statistically significant. In unreported regressions, we also examine whether institutional investor nationality plays a significant role in establishing a positive link between CEO pay and performance in family firms, but, again, the interaction coefficients are not statistically significant. Thus, institutional investors do not seem to take an active approach toward linking CEO pay to performance in family firms. 4.5. Country-level analysis In this section, we provide some evidence on CEO compensation at the country level. Panel A of Table 9 presents the average and median compensation by country. The average total compensation is higher than €3 million in Switzerland, and more than €2 million in Finland, Germany, and Italy. On average, firms in Finland and Switzerland pay their CEOs more than €1 million in equity-based compensation, but also French and Italian firms pay considerably higher equity-based compensation to their CEOs. In Panel B of Table 9, we present the estimates of the regression model we use in Table 3 for the four countries for which we have a relatively large number of observations: France, Germany, Sweden, and the Netherlands. While we lose some statistical significance because the number of observations is smaller, overall, our results for these four countries tend to support the evidence from the full sample: the coefficient for the family-control dummy is generally negative,38 and higher institutional ownership is associated with higher compensation. 5. Conclusions Empirical analysis of the determinants of CEO compensation has been mostly carried out in a single-country context, usually in the US or the UK. A large number of studies have focused on firm-specific determinants of CEO compensation and how CEO compensation is related to firm performance and governance characteristics in US companies. In this paper, we examine various aspects of CEO compensation by using a large sample of 14 37 We also replicate this analysis by interacting the family control dummy with the market-to-book ratio. Again, the interaction variable is not significant. 38 The only exception is Sweden.

Continental European countries over the period from 2001 to 2008. Given the prevalence of concentrated ownership structures in Continental Europe where families own large, and often controlling equity stakes in listed firms, it is important to understand how CEO incentives and compensation packages differ from those in the US and the UK, where most listed firms are widely held, and concentrated ownership by families is relatively rare. We perform the first cross-country analysis of CEO compensation in Continental Europe, examining how family control and institutional investors can influence the CEO compensation level and the pay-for-performance link. We also show that family control curbs CEO compensation, thus reducing CEO total compensation, including both cash and equity-based compensation. We document that this effect is particularly strong in firms with family CEOs, indicating that CEO compensation is not used by the controlling family to expropriate wealth from minority investors. Additionally, we provide evidence suggesting that institutional investors partially counterbalance the negative effect of familycontrol on the level of CEO compensation, and increase the level of CEO compensation. However, similar to the evidence provided by Fernandes et al. (2012), we find that institutional investors also increase the fraction of equity-based compensation, thereby making CEO pay riskier and more aligned with the interests of the shareholders. Thus, the increase in CEO pay associated with institutional investors can be interpreted as compensation for the increase in the risk (Conyon et al., 2011; Fernandes et al., 2012). Acknowledgements We thank an anonymous referee, Laurent Bach, Ron Masulis, Roberto Mura, Ari Pandes, Raghavendra Rau, Lingling Wang, Jayant Kale, and the participants at the 8th International Paris Finance Meeting 2010, EFMA 2011, Braga, ESRC Conference on Corporate Governance and Investment, 2011, FMA Annual Meeting, 2011, Denver, the Midwest Finance Association Meeting, 2012, New Orleans, and the FMA European Meeting, 2012, Istanbul, for insightful comments and suggestions. References Aggarwal, R., Erel, I., Ferreira, M., Matos, P., 2011. Does governance travel around the world? Evidence from institutional investors. Journal of Financial Economics 100, 154–181. Amoako-Adu, B., Baulkaran, V., Smith, B.F., 2011. Executive compensation in firms with concentrated control: the impact of dual class structure and family management. Journal of Corporate Finance 17, 1580–1594. Andres, C., Theissen, E., 2008. Setting a fox to keep the geese – does the comply-orexplain principle work? Journal of Corporate Finance 14, 289–301. Barak, R., Cohen, S., Lauterbach, B., 2011. The effect of CEO pay on firm valuation in closely held firms. In: Kose, J., Makhija, A.K. (Eds.), International Corporate Governance, Advances in Financial Economics, vol. 14. Emerald Group Publishing Limited, Bingley, UK, pp. 19–42. Barontini, R., Bozzi, S., 2012. CEO Compensation and Performance in Family Firms. Working Paper, Scuola Superiore Sant’Anna, Pisa. Barca, F., Becht, M., 2001. The Control of Corporate Europe. Oxford University Press, Oxford. Bebchuk, L., Fried, J., 2003. Executive compensation as an agency problem. Journal of Economic Perspectives 17, 71–92. Bennedsen, M., Nielson, K.M., Perez-Gonzalez, F., Wolfenzon, D., 2007. Inside the family firm: the role of families in succession decisions and performance. Quarterly Journal of Economics 122, 647–691. Bertrand, M., Schoar, A., 2006. The role of family in family firms. Journal of Economic Perspectives 20, 73–96. Conyon, M.J., Murphy, K.J., 2000. The prince and the pauper: CEO pay in the US and UK. Economic Journal 110, 640–671. Conyon, M.J., Fernandes, N., Ferreira, M.A., Matos, P., Murphy, K.J., 2010. The Executive Compensation Controversy: A Transatlantic Analysis. Working Paper, Fondazione Rodolfo De Benedetti. Conyon, M.J., Core, J.E., Wayne, R.G., 2011. Are US CEOs paid more than UK CEOs? Inferences from risk-adjusted pay. Review of Financial Studies 24, 402–438. Core, J.E., Holthausen, R.W., Larcker, D.F., 1999. Corporate governance, chief executive officer compensation, and firm performance. Journal of Financial Economics 51, 371–406.

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