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Media coverage, board structure and CEO compensation: Evidence from Taiwan
J. of Multi. Fin. Manag. 23 (2013) 434–445
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Journal of Multinational Financial Management journal homepage: www.elsevier.com/locate/econbase
Media coverage, board structure and CEO compensation: Evidence from Taiwan Chia-Wei Chen a,∗, Bingsheng Yi b, J. Barry Lin c a b c
Tunghai University, Taichung, Taiwan California State University-Dominguez Hills, Carson, CA, USA School of Management, Simmons College, Boston, USA
a r t i c l e
i n f o
Article history: Received 2 February 2012 Accepted 6 August 2013 Available online 16 August 2013 Keywords: CEO compensation Media coverage Board Corporate governance
a b s t r a c t This paper investigates the relationship between CEO cash compensation and media coverage of firms, analyst forecasts and board structure using data from the Taiwan Stock Exchange. We find that, other things being equal, CEO cash compensation is much higher for firms with greater media coverage, firms with more positive news, firms with more analyst forecasts, and firms with larger institutional holdings. There is little evidence that board size and board independence affect CEO cash compensation, and CEO duality is negatively associated with CEO cash compensation © 2013 Elsevier B.V. All rights reserved.
1. Introduction Mass media coverage is a major channel of financial information and corporate disclosure. Media coverage often asserts an immense influence on public opinion and investor sentiments. Nowadays, financial media reports are frequently associated with public anger and outcry about corporate fraudulent practices and untruthful financial disclosure. In many cases, media coverage results in severely negative stock market reactions when corporate wrong doings are uncovered by investigative reporters. With the advent of the Internet and 24/7 financial news TV channels, financial media coverage has become a powerful source of information, which often surfaces far ahead of any legally required regulatory corporate reports and disclosures such as SEC requirements or GAAP practices. Fang and Peress (2009) report evidence of a relationship between media coverage and crosssectional expected stock returns. In particular, they find stocks with no media coverage earn higher ∗ Corresponding author. E-mail address: [email protected] (C.-W. Chen). 1042-444X/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.mulfin.2013.08.003
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returns than stocks with high media coverage. This is sometimes referred to as the “neglected firms” effect, which is similar to the small firm effect, and indicates the result of mispricing due to a lack of information. Dyck et al. (2008) investigate media coverage and its effect on corporate governance on firms in Russia. They find that Anglo-American media coverage increases the probability of a corporate governance violation being reversed. This result is in agreement with similar episodes observed in the U.S. For example, media coverage of activist investors often results in corporate governance changes as well. In a separate strand of research, Chhaochharia and Grinstein (2009) find a significant decrease in CEO compensation for firms which are required by US stock exchanges to strengthen their board oversight. Other papers document evidence that board decisions often strongly affect CEO compensation (see, among others, Fama (1980); Fama and Jensen (1983); Jensen (1993); Hall and Murphy (2003); Bebchuk et al. (2002), and Bebchuk and Fried (2003)). Core et al. (2008) examine the impact of media coverage on CEO compensation after such media releases. They find little evidence that (1) firms respond to negative media coverage by decreasing excessive CEO compensation or (2) that negative media coverage leads to increased CEO turnover. Their findings thereby cast doubt on the notion that media coverage exerts an important influence on corporate governance choices (e.g., Dyck and Zingales (2004); Joe et al. (2009)). Nguyen (2011) investigates the impact of media coverage and positive coverage of CEOs on firm value and CEO compensation among Fortune 500 firms from 1992 and 2002. Nguyen (2011) finds that fortune 500 firms with high levels of CEO media coverage and positive coverage exhibit higher Tobin’s q. Greater media coverage and more positive coverage are associated with higher CEO compensation. There is a large body of literature on board size and firm performance with mixed empirical results. Numerous finance studies have found evidence supporting an agency-theory argument which suggests that smaller boards are better monitors of corporate management (see Yermack (1996); Eisenberg et al. (1998) and Denis and Sarin (1999), among others). Gertner and Kaplan (1996) suggest that large boards are more likely to have coordination problems and potential for free riders, which may lead to inefficiency. Based on a resource dependency perspective, however, other studies have found evidence that large boards perform better (Gales and Kesner (1994), and Dalton et al. (1999)). While the empirical evidence is mixed, it seems clear that board size is a significant factor on the effectiveness of monitoring on corporate management from the board. Ning et al. (2010) provide a good review of the board size literature and find empirical evidence of a mean-reversion pattern in board size. They argue that corporations try to optimise board size to balance between agency costs and resource dependency. Core et al. (2008) and Nguyen (2011) examine the effects of news about CEOs on CEO compensation among U.S. firms. Unlike them, our paper investigates the effects of news about firms on CEO cash compensation among firms listed in the Taiwan Stock Exchange and its over-the-counter market. It also directly examines the potential impact of board structure, analyst forecasts1 , and CEO duality on CEO compensation. Following similar studies of CEO compensation and corporate governance, our model also incorporates other important control variables such as institutional ownership, firm age, firm performance and growth opportunities. We find strong evidence that media coverage of firms is strongly associated with CEO cash compensation, with CEOs of firms with high media coverage receiving substantially higher cash compensation. Firms receiving more positive news also pay greater cash compensation to their CEOs. Analyst forecasts are also positively related to CEO cash compensation. Hartzell and Starks (2003) document a significantly negative relationship between the level of executive cash compensation and institutional ownership in U.S. firms. In contrast, we find a positive relationship between level of CEO cash compensation and institutional ownership in Taiwanese firms. This may reflect the close connection between company executives and the financial service and banking sectors commonly observed in Taiwan.
1 Unlike in the U.S., where the number of analysts following (analyst coverage) a listed firm is available directly, we are unable to obtain analyst coverage, and as a substitute, we use the number of analyst forecasts disclosed in media in a calendar year.
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Prior studies show that small boards and boards with greater percentages of independent members may be more effective monitors since these types of firms perform better. We find that board size and board independence have little effect on CEO cash compensation. CEO duality (CEOs who also serve as the chairman of the board) has a negative effect on CEO cash compensation. Our study is the first to present direct evidence regarding the impact of media coverage of firms, board structure, and analyst forecasts on CEO compensation; in addition, we present new evidence related to the impact of institutional ownership on CEO compensation using data from Taiwan. Our study explores and extends the linkage between CEO compensation and media coverage, analyst forecasts, board structure, CEO duality and institutional ownership. We also call for more research on this topic using data from other countries or regions. 2. Data and key variables Our media coverage data is collected from TEJ (Taiwan Economic Journal Co., Ltd), one of the largest business publications in Taiwan. This publication is comparable to the Wall Street Journal in the U.S. Media coverage is measured by the total number of news pieces about firms over a calendar year. We also collect the good/bad news index from CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. CMoney constructs and reports the good/bad news index value monthly. In our analysis, we use the average monthly positive news index over a calendar year to measure good/bad news and the strength of news about a firm. The results are qualitatively the same when we use the median monthly positive new index. Our sample firms include 1189 non-financial firms listed in the TSE (Taiwan Stock Exchange) and its OTC sections in Taiwan over the period from 2005 to 2008. The sample includes a total of 4430 firm-year observations.2 The financial and accounting variables are collected from TSE financial database, which is comparable to Compustat in the US. Following earlier studies, we measure CEO compensation by three variables: bonuses, salary, and total compensation. We include a set of control variables to separate out associated effects. These control variables include: Number of analyst forecasts. Prior studies have found that firms followed by more analysts perform better and practice less earnings management (see Yu (2008)). We are unable to directly collect data on the number of analysts following listed Taiwanese firms. We use the number of analyst forecasts disclosed in the media in a calendar year as a substitute, since the more the number of analysts following a firm, the greater the number of analyst forecasts are issued. In addition, the number of analyst forecasts can also be considered as an alternative measure of media coverage. CEO duality. Previous studies have found that dual title (CEO who also serves as chairman of the board) is associated with excessive CEO power and low firm performance. Board size. Mixed but statistically significant empirical results have been found in relation to the linkage between board size and firm performance or firm governance. Percentage of independent directors. Associated with better firm performance or governance. Institutional ownership. Institutional shareholders are associated with better firm performance or governance. Return on equity. This is a measure of firm performance, controlling for performance-driven CEO compensation. Market to book ratio. This variable controls for market valuation effect, and also serves as a proxy for firm growth potential. As firms with more growth opportunities may be more likely to use noncash compensation, we expect a negative relationship between market to book ratio and level of cash compensation to CEOs. Sales. This variable is measure of firm size which controls for size-related CEO compensation difference. 2 We use a natural logarithm of sales to measure firm size in regressions. One firm had 0 sales in Year 2008 and the same firm generated sales of NT$ 219,264,000 in 2007. We drop the observation in 2008. Our results are qualitatively similar when a natural logarithm of asset value is used to proxy for firm size. Our sample size is decreased to 4389 after dropping the firm-year observations without good/bad news index values.
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Table 1 Summary statistics.
Media coverage Good/bad news index (%) Number of analyst forecasts Bonuses (NT$000) Salary (NT$000) Total cash compensation (NT$000) CEO duality dummy Board size Independent director(s) Board independence (%) Institutional ownership (%) Market to book value ratio Return on equity (%) Return on assets (%) TSE dummy Firm age since listed Sales (NT$000,000) Total assets (NT$000,000)
N
Mean
5%
Median
95%
Std. Dev.
4430 4389 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430
206 4.73 3.43 3097 8968 12,065 0.30 6.80 0.98 15.08 35.68 1.34 16.31 3.55 0.56 8.52 11,600 13,000
54 −1.36 0 0 0 0 0 5 0 0 5.28 0.62 −25.09 −15.58 0 1 278 577
141 3.53 3 579 6225 7581 0 7 0 0 31.73 1.05 11.85 4.73 1 6 2306 3113
568 14.62 7 13,285 27,730 38,298 1 11 3 40 77.91 2.85 68.90 19.10 1 26 37,800 45,500
225 5.04 2.28 8534 11,040 16,983 0.46 2.21 1.07 16.58 22.52 1.33 33.74 13.26 0.50 8.00 53,100 44,700
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on a board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. Return on assets is the income before interests and depreciations divided by total assets. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ).
Firm age. Older firms may be more established and reputable. CEOs in more reputable firms may receive higher compensation. TSE dummy. To control for potential effect due to stock exchange listing, versus over the counter, we use a dummy variable for Taiwan Stock Exchange listed stocks. Following similar empirical studies, we also use year and industry dummy variables to control for the impact on CEO compensation of year and industry. 3. Empirical results In terms of methodology, we apply both univariate analyses and multivariate regression models in analyzing the effect of media coverage on CEO compensation. Table 1 shows summary statistics for our sample firms. CEOs in Taiwan receive, on average, total compensation of NT$12,065,000, with mean bonuses of about NT$3,097,000. Bonuses account for about 25% of the total compensation package. This is a substantially lower fraction in comparison to US CEO compensation patterns. An average publicly traded Taiwanese firm receives 206 pieces of media coverage in the Taiwan Economic Journal, with 568 pieces for firms in the 95th percentile, and 54 for firms in the 5th percentile, exhibiting a large range of media coverage among the sample firms. The good/bad news index ranges from −1.36 (5th percentile) to 14.62 (95th percentile), and has an average value of 4.73, suggesting that on average news on firms in Taiwan tends to be slightly positive. Number of analyst forecasts also varies greatly, ranging from 7 (95th percentile) to 0 (5th percentile), with a mean of 3.43. Board size ranges from 11 board members at the 95th percentile to 5 members at the 5th percentile. The mean board size is 6.8 (median is 7). These are much lower numbers in comparison to those from the U.S. Both of the above two variables reflect the emerging market nature of the Taiwanese economy. The number of independent directors is also low relative to the U.S., with a mean of only 1 independent director
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Table 2 Univariate test results. >Median
≤Median
(1)
(2)
(1)–(2)
Panel A: Media coverage Bonuses (NT$000) Salary (NT$000) Total compensation N
4753 12,066 16,819 2203
1459 5903 7362 2227
3294a 6163a 9457a
Panel B: Positive news index Bonuses (NT$000) Salary (NT$000) Total compensation N
4704 11,785 16,489 2235
1460 6100 7560 2195
3244a 5685a 8929a
Panel C: Number of analyst forecasts Bonuses (NT$000) Salary (NT$000) Total compensation N
4554 11,479 16,033 2145
1729 6611 8340 2285
2825a 4868a 7693a
Panel D: Board size Bonuses (NT$000) Salary (NT$000) Total compensation N
5179 12,244 17,421 935
2540 8091 10,631 3495
2639a 4152a 6790a
Panel E: Board independence Bonuses (NT$000) Salary (NT$000) Total compensation N
2851 8931 11,782 2175
3334 9003 12,338 2255
−483b −72 −556
Panel F: CEO duality Bonuses (NT$000) Salary (NT$000) Total compensation N
2423 8326 10,748 1309
3380 9237 12,617 3121
−957a −911a −1869a
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Board independence is the ratio of the number of independent director(s) to board size multiplied by 100. All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 10%.
in each board (95th percentile is still low at 3). Board independence is measured by the percentage of independent board members on a board, which is calculated by the number of independent board members divided by the total number of board members. On average, only about 15 percent of board members in Taiwanese firms are independent. This reflects the common Asian cultural practice of selecting directors with close ties to the CEO or to the founding family which usually retains large if not controlling ownership. Institutional ownership varies from about 78% (95th percentile) to about 5% (5th percentile), with a mean of about 36%. Our regression analysis later shows a substantial positive relationship between institutional ownership and CEO compensation, which could also reflect the common close relationship between corporate executives and the banking/finance industry. 30 percent of the firms have dual-title CEOs, indicating that a large number of CEOs have potential agency problems. Table 2 reports test results for our univariate comparisons. We divide our sample into two subsamples according to the median value of several of the key variables, and then compare the mean
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CEO compensations between the sub-samples with the above- and below-median value of the control variables. These comparisons give a clear first indication of what variables are driving differences in CEO compensation. Our first and foremost key variable is media coverage. In Panel A, average total CEO compensation of firms with higher than average media coverage is more than twice that of CEOs of firms with below average media coverage. This is a very substantial difference. The difference in bonuses is especially pronounced; it is more than three times higher for the high media coverage sub-sample. Almost the same degree of difference can be observed on the effect of good/bad news index and number of analyst forecasts, as reported in Panel B and Panel C respectively. In Panel D, firms with above average board size pay their CEO almost twice as much in bonuses as firms with below average board size. The salaries they pay are more than 50% higher. The difference in total CEO compensation is more than 70%. This can be interpreted as evidence of inefficiency in larger boards. Corresponding to the free-riding and coordination cost issues, large boards are less efficient in monitoring firms. In this instance, this type of inefficiency affects CEO compensation. Panel E examines the impact of board independence on CEO cash compensation. Firms with an above average percentage of independent board members (associated with better monitoring) pay their CEO less than firms with a lower percentage of independent board members. However, the difference is quite small and only statistically significant for bonuses. This variable is insignificant for both salary and total CEO compensation. Finally, in Panel F, CEOs with dual titles (the CEO also acts as chairperson of the board) (this is found to be associated with worse firm performance due to excessive CEO power) receive lower cash compensation. This result is in fact surprising because the conventional wisdom is that powerful CEOs (here, the ones with dual titles) benefit themselves at the expense of the company and the shareholders. We conjecture that if CEOs with dual titles receive too much cash compensation, attention will be more easily caught, thereby subjecting these CEOs to more criticism. Therefore, CEOs with dual titles prefer greater equity based compensation, which is less overt. Table 3 reports the correlations among key variables. Confirming the univariate test results, bonuses, salary and total cash compensation are all positively and significantly correlated with media coverage, good/bad news index, number of analyst forecasts and board size. However, the above variables are all negatively correlated with CEO duality. Board independence has small negative correlation with bonuses, salary and total cash compensation. Only the correlation with bonuses shows weak significance. Table 3 also shows that CEO compensations are significantly and positively related to return on equity, natural logarithm of sales (log of sales in short thereafter), firm age and TSE dummy. Correlations between CEO compensation and media coverage, CEO compensation and good/bad news index and CEO compensation and log of sales are larger than correlations between CEO compensation and other variables, indicating media coverage, good/bad news index, and log of sales may have greater impact on CEO compensation than other variables. Table 4 reports the OLS regression results with robust error.3 The results confirm our earlier findings in the univariate tests and correlation analysis. In particular, media coverage and good/bad news index are found to have a highly significant and positive effect on bonuses, salary and total CEO cash compensation. Coefficients of the number of analyst forecasts are all positive, but only the coefficients in Column 3 and 5 are significant. Board size and board independence have no significant impact on CEO cash compensation. Coefficients of CEO duality dummies are all negative, while only the coefficients in Column 1 and Column 5 are significant, suggesting that after controlling for impact of media coverage and other variables (not including good/bad news index), CEOs in firms with CEO duality may receive less bonuses and less total cash compensation. This evidence does not reject the potentially more severe agency problems in firms with CEO duality. Instead, since cash compensation is overt and easily attracts attention and criticism, firms with more severe agency problems might pay greater equity-based compensations to their CEOs. Unlike the negative relationship between institutional
3 The Breusch–Pagan/Cook–Weisberg test for heteroskedasticity shows that the error of OLS regression does not have constant variance, so we use OLS regression to control for the heteroskedasticity of the error term.
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Table 3 Correlation. Bonuses 0.50a 0.83a 0.39a 0.28a 0.18a
Total cash compensation
Media coverage
0.90a 0.48a 0.33a 0.24a
0.51a 0.35a 0.25a
0.57a 0.40a
−0.04b 0.14a
−0.05a 0.15a
−0.01 0.18a
Board independence
−0.05a 0.13a −0.02c
−0.02
−0.02
Institutional ownership Return on equity Market to book value Log of sales Firm age TSE dummy
0.20a 0.15a −0.03c 0.39a 0.13a 0.18a
0.20a 0.11a −0.02 0.49a 0.12a 0.23a
0.23a 0.15a −0.02 0.51a 0.14a 0.24a
−0.003 0.32a 0.36a 0.10a 0.57a 0.14a 0.23a
CEO duality Board size
Good/bad news index
Number of analyst forecasts
CEO duality
−0.04b 0.13a 0.04b
−0.06a 0.14a 0.13a
−0.13a
0.24a 0.44a 0.13a 0.47a 0.09a 0.23a
0.26a 0.47a 0.07a 0.45a −0.05a 0.13a
Board size
Board independence
Institutional ownership
Return on equity
Market to book value
Logarithm of sales
−0.03b 0.17a 0.10a −0.09a −0.50a −0.31a
0.29a 0.06a 0.34a 0.14a 0.21a
0.13a 0.28a −0.14a 0.06a
−0.10a −0.13a −0.10a
0.21a 0.41a
Firm age
0.41a
−0.001 −0.12a −0.08a 0.05a −0.12a −0.007 −0.02
−0.11a 0.20a 0.02 −0.04a 0.27a 0.22a 0.15a
0.45a
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. Return on assets is the income before interests and depreciations divided by total assets. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
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Salary Total cash compensation Media coverage Good/bad news index Number of analyst forecasts
Salary
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Table 4 OLS regression results controlling for heteroskedasticity of regression errors.
Media coverage
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index Number of analyst forecasts CEO duality Board size Board independence Institutional ownership Return on equity Market to book value ratio Log of Sales Firm age TSE dummy Constant Year and industry dummies R-square N
(2)
10.36a (5.65)
73.28 (1.08) −369.43c (−1.72) 43.10 (0.55) 7.64 (0.85) 14.80a (2.90) −6.30 (−1.21) −85.49 (−1.39) 1161.81a (9.03) 24.44 (1.18) 284.58 (1.56) −15,706a Yes 0.221 4430
(4)
14.50a (8.72) 176.85a (3.75) 78.71 (1.18) −103.54 (−0.49) 87.86 (1.10) 3.98 (0.43) 22.92a (4.22) −1.18 (−0.19) 2.40 (0.05) 1606.88a (10.38) 67.55a (3.04) 59.67 (0.32) −22,363a Yes 0.185 4389
144.12c (1.66) −384.62 (−1.50) 27.01 (0.39) −6.96 (−0.68) 10.80 (1.41) −42.24a (−5.38) −170.71b (−1.97) 2296.56a (16.32) 64.67b (2.77) 1363.51a (5.18) −31,966a Yes 0.369 4430
(6)
24.87a (8.37) 191.05a (4.37) 139.22 (1.49) −95.50 (−0.39) 85.24 (1.18) −7.51 (−0.70) 23.90a (2.93) −31.43a (−2.90) −20.32 (−0.25) 3010.20a (16.86) 125.22a (4.80) 1204.37a (4.31) −42494a Yes 0.321 4389
217.40c (1.72) −754.05b (−2.00) 70.11 (0.56) 0.69 (0.04) 25.60b (2.40) −48.54a (−4.62) −256.21c (−1.91) 3458.37a (15.01) 89.11b (2.40) 1648.09a (4.40) −47672a Yes 0.383 4430
367.90a (4.84) 217.93 (1.60) −199.04 (−0.54) 173.10 (1.34) −3.54 (−0.21) 46.82a (4.05) −32.61b (−2.16) −17.91 (−0.15) 4617.08a (15.79) 192.77a (4.90) 1264.05a (3.15) −64857a Yes 0.327 4389
Media coverage represents the total number of news stories about a firm during a calendar year. The good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on a board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by the book value of equity. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
ownership and executive compensation in American firms reported by Hartzell and Starks (2003), Table 3 shows a positive relationship between CEO compensation and institutional ownership, indicating that institutional investors may not be effective monitors in Taiwan, possibly reflecting close ties between CEOs and the financial service industry. This is a fairly common cultural practice found in many emerging Asian-Pacific markets. Consistent with prior studies, our results also show that CEOs in larger firms and/or older firms receive greater compensation. All the coefficients of market to book value ratio are negative in all regressions. However, in only a few regressions, the impact of market to book value ratio on CEO compensation is significant. Market to book value ratio is commonly used as a proxy for a firm’s growth opportunities. Firms with higher market to book value ratio have more growth opportunities and need more cash. Therefore, these firms would be more likely to
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Table 5 Fixed-effect model regression results.
Media coverage
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index Number of analyst forecasts CEO duality Board size Board independence Institutional ownership Return on equity Market to book value ratio Log of sales Firm age TSE dummy Constant Year dummies Industry dummies Model F-stat R-square overall N
(2)
2.30b (2.23)
122.15c (1.81) −420.13 (−1.18) 270.71b (2.02) 3.70 (0.25) 17.98 (1.49) 11.05b (2.06) −70.36 (−0.71) 663.81a (2.63) 843.51a (9.49) −248.50 (−0.26) −17,297a Yes No 12.31 0.054 4430
(4)
83.31a (2.66) 138.83b (2.06) −409.47 (−1.14) 278.84b (2.07) 4.32 (0.29) 18.70 (1.54) 7.58 (1.35) −83.35 (−0.83) 653.19b (2.58) 809.56a (8.81) −213.93 (−0.23) −16,810a Yes No 12.42 0.053 4389
75.54 (1.21) −213.88 (−0.65) 44.69 (0.36) −0.43 (−0.03) −6.44 (−0.58) −7.86 (−1.59) −32.51 (−0.35) 510.77b (2.19) 716.60a (8.72) −812.91 (−0.94) −5880c Yes No 14.76 0.074 4430
(6)
8.67a (5.49)
6.37a (6.69) 84.01a (2.91) 128.76a (2.08) −197.51 (−0.60) 35.42 (0.29) −0.67 (−0.05) 1.00 (0.09) −9.24c (−1.79) −20.45 (−0.22) 610.38a 2.62) 679.69a (8.03) −709.38 (−0.82) −6534c Yes No 11.53 0.049 4389
197.69c (1.91) −634.01 (−1.16) 315.40 (1.54) 3.27 (1.54) 11.54 (0.62) 3.20 (0.39) −102.87 (−0.67) 1174.58a (3.03) 1560.11a (11.44) −1061.41 (−0.74) −23,177a Yes No 19.83 0.084 4430
167.32a (3.48) 267.59b (2.59) −606.98 (−0.27) 314.26 (1.52) 3.65 (0.16) 19.70 (1.06) −1.66 (−0.19) −103.79 (−0.68) 1263.57a (3.25) 1489.24a (10.57) −923.31 (−0.64) −23,344a Yes No 18.09 0.069 4389
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from Taiwan Economic Journal (TEJ). a b c
Indicate significance levels at 1%. Indicate significance levels at 5%. Indicate significance levels at 10%.
use equity-based compensation to incentivize their CEOs. In Taiwan, firms traded in TSE are larger and older. These firms also receive greater media and analyst attention than firms traded in the OTC market. Moreover, CEOs in firms traded in TSE receive greater compensation, so the coefficients of TSE dummy are significantly positive. The return to equity control variable shows negative and significant coefficients for some of the regressions. We conjecture that as a firm’s return on equity increases, the firm might be more likely to increase equity-based compensation to their CEO. Cash compensation may not change much and sometimes may even decrease if equity-based compensation increases significantly. Therefore, we may observe negative and inconsistent relationships between ROE and cash compensation. Daily et al. (1998) find that although ROE tends to impact CEO compensation,
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Table 6 OLS regression results using one year-lagged values of press coverage, good/bad news index, number of analyst forecasts, and return on equity.
Media coverage−1
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index−1 Number of analyst forecasts−1 CEO duality Board size Board independence Institutional ownership Return on equity−1 Market to book value Log of Sales Firm age TSE dummy Constant Year and industry dummies R-square N
(2)
12.97a (5.36)
36.68 (0.39) −616.14b (−2.19) 85.78 (0.81) 8.66 (0.76) 19.26a (2.79) −7.28 (−0.92) −17.76 (−0.23) 1278.59a (7.62) 24.65 (0.89) 395.32c (1.69) −16,162a Yes 0.240 3241
(4)
17.68a (8.55) 221.42a (3.87) 25.98 (0.26) −296.34 (−1.09) 153.15 (1.44) 6.63 (0.54) 29.31a (4.10) −2.04 (−0.20) 44.42 (0.60) 1798.51a (9.71) 70.45b (2.51) 122.62 (0.50) −25,068a Yes 0.197 3212
98.98 (0.88) −609.12b (−1.99) 26.55 (0.31) −1.66 (−1.04) 14.67 (1.57) −41.26a (−3.39) −96.92 (−0.84) 2276.72a (13.81) 60.45b (2.01) 1342.25a (4.62) −28,869a Yes 0.396 3241
(6)
30.65a (8.17) 174.17a (3.28) 89.56 (0.72) −195.25 (−0.65) 119.32 (1.32) 1.43 (0.11) 30.84a (3.03) −27.19 (−1.62) 23.18 (0.20) 3117.82a (14.89) 128.18a (3.97) 1339.08a (3.95) −42,522a Yes 0.332 3212
135.65 (0.83) −1225.27b (−2.58) 112.33 (0.69) 6.99 (0.36) 33.93b (2.52) −48.54a (−3.08) −114.69 (−0.67) 3555.31a (12.62) 83.10c (1.86) 1827.57a (3.97) −45,031a Yes 0.383 3241
395.58a (4.21) 115.53 (0.62) −491.59 (−1.05) 272.47 (1.61) 8.07 (0.38) 60.15a (4.08) −29.23 (−1.23) 67.60 (0.40) 4916.32a (14.04) 198.64a (4.04) 1461.69a (2.89) −67,589a Yes 0.336 3212
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. TSE dummy is 1 if the observation is traded in Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
the direction of ROE’s impact is inconsistent across years and compensation measures. Due to data limitations, we are not able to test this possibility here. It may be an interesting question for future research to examine the impact of ROE on CEO compensation structure. To control for the possible impact of unobservable firm characteristics on CEO compensation, we also apply the fixed effect model. The fixed-effect regression results are reported in Table 5. Media coverage, good/bad news index and log of sales continue to show positive and significant impact on CEO compensation. The impact of number of analyst forecasts becomes more significantly positive, with coefficients of number of analyst forecasts being significantly positive in five of the six fixed-effect model regressions. Board size becomes significantly related to bonuses. Impact of board independence remains insignificant.
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As a robustness test, to mitigate the potential endogeneity problem (firms that pay greater cash compensation to their CEOs may receive more media coverage) and the evidence that Taiwanese firms tend to compensate their CEOs based on the prior year’s firm performance (Yu (2010)), we use one year-lagged media coverage, one year-lagged good/bad news index, one-year lagged number of analyst forecasts, and one year-lagged return on equity to explain the variations in the current year’s compensation, as seen in Table 6. The results are qualitatively similar to results reported in Table 4. In addition, we also use return on assets as a measure of firm performance and log of total assets as a proxy for firm size. The results remain qualitatively the same and are not reported. 4. Conclusions CEO compensation has come under close scrutiny as the gap between executive compensation and average worker compensation continues to widen. The recent financial crisis has especially drawn investors’ attention to executive compensation as corporations have continued to offer their executives high compensation even when firm performance has not been good. This paper focuses on one particular area of this complex issue by investigating whether and how the amount of news on firms (media coverage), good/bad news on firms, analyst forecasts and board structure affect the level of CEO cash compensations, using a sample of Taiwanese publicly traded firms. Core et al. (2008) find little evidence that negative media coverage of CEOs and on their compensations affect either subsequent CEO compensation or CEO turnover among U.S. firms. We find a significant and positive relationship between CEO compensation and media coverage of firms, and between CEO compensation and good/bad news about firms. We find some evidence that the number of analyst forecasts is positively associated with CEO cash compensation. In addition, we find a significant relationship between CEO compensation and other governance variables such as CEO duality and institutional ownership. In contrast to the negative relationship between executive compensation and institutional ownership among American firms found in Hartzell and Starks (2003), we find that CEOs in Taiwanese firms with greater institutional ownership receive higher compensation. Our study contributes to the literature by providing significant empirical evidence related to this important corporate governance issue by using an international sample of listed firms in Taiwan. Our study is the first to investigate the potential impact of media coverage, board structure and analyst forecasts on CEO compensation. We present new evidence of the impact of institutional ownership on CEO compensation. Our paper highlights the effect of media coverage on CEO compensation, and shows that media coverage can be and should be considered a meaningful and viable corporate governance instrument. For future studies, it will be interesting to investigate the impacts of media coverage and board structure on CEO compensation structure and pay-for-performance sensitivity. In addition, many large Taiwanese firms used to be and many continue to be family owned (or have the founding family as a majority or minority owner). Family ownership or, by extension, managerial ownership can be an important factor in the determination of CEO compensation. This would be an interesting additional variable for future investigation.4 References Bebchuk, L., Fried, J., 2003. Executive compensation as an agency problem. J. Econ. Perspect. 17, 71–92. Bebchuk, L., Fried, J., Walker, D., 2002. Managerial power and rent extraction in the design of executive compensation. University of Chicago Law Review 69, 751–846. Chhaochharia, V., Grinstein, Y., 2009. CEO compensation and board structure. J. Finance 64, 231–261. Core, J., Guay, W., Larcker, D., 2008. The power of the pen and executive compensation. J. Financ. Econ. 88, 1–25. Daily, C., Johnson, J., Ellstrand, A., Dalton, D., 1998. Compensation committee composition as a determinant of CEO compensation. Acad. Manage. J. 41, 209–220. Dalton, D., Daily, C., Johnson, J., Ellstrand, A., 1999. Number of directors and financial performance: a meta-analysis. Acad. Manag. J. 42, 674–686. Denis, D., Sarin, A., 1999. Ownership and board structures in publicly traded corporations. J. Financ. Econ. 52, 187–223.
4
We thank a reviewer for pointing this out.
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Dyck, A., Volchkova, N., Zingales, L., 2008. The corporate governance role of the media: evidence from Russia. J. Finance 63, 1093–1136. Dyck, A., Zingales, L., 2004. Private benefits of control: an international comparison. J. Finance 59, 537–600. Eisenberg, T., Sundgren, S., Wells, M., 1998. Larger board size and decreasing firm value in small firms. J. Financ. Econ. 48, 35–54. Fama, E., 1980. Agency problems and the theory of the firm. J. Polit. Econ. 88, 288–307. Fama, E., Jensen, M., 1983. Separation of ownership and control. J. Law Econ. 26, 301–325. Fang, L., Peress, J., 2009. Media coverage and the cross-section of stock returns. J. Finance 64, 2023–2052. Gales, L., Kesner, I., 1994. An analysis of board of director size and composition in bankrupt organizations. J. Bus. Res. 30, 271–282. Gertner, R., Kaplan, S., 1996. The value-maximizing board. University of Chicago, Working Paper. Hall, B., Murphy, K., 2003. The trouble with stock options. J. Econ. Perspect. 17, 49–70. Hartzell, J., Starks, L., 2003. Institutional investors and executive compensation. J. Finance 58, 2351–2374. Jensen, M., 1993. The modern industrial revolution, exit, and the failure of internal control systems. J. Finance 48, 831–880. Joe, J., Louis, H., Robinson, D., 2009. Managers’ and investors’ responses to media exposure of board ineffectiveness. J. Financ. Quant. Anal. 44, 579–605. Nguyen, B.D., 2011. Is More News Good News? Media Coverage of CEOs, Firm Value, and Rent Extraction (28.02.11). In: ASSA/AFE 2006 Boston Meetings Paper, Available at SSRN: http://ssrn.com/abstract=800746 or http://dx.doi.org/10.2139/ssrn.800746 Ning, Y., Davidson, W., Wang, J., 2010. Does optimal corporate board size exist? An empirical analysis. J. Appl. Finance 20, 57–69. Yermack, D., 1996. Higher market valuation of companies with a small board of directors. J. Financ. Econ. 40, 185–211. Yu, F., 2008. Analyst coverage and earnings management. J. Financ. Econ. 88, 245–271. Yu, Hsin-Yi, 2010. Politically-connected boards and the structure of chief executive officer compensation packages in Taiwanese firms. Asia Pac. J. Financ. Stud. 39, 578–606.
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Journal of Multinational Financial Management journal homepage: www.elsevier.com/locate/econbase
Media coverage, board structure and CEO compensation: Evidence from Taiwan Chia-Wei Chen a,∗, Bingsheng Yi b, J. Barry Lin c a b c
Tunghai University, Taichung, Taiwan California State University-Dominguez Hills, Carson, CA, USA School of Management, Simmons College, Boston, USA
a r t i c l e
i n f o
Article history: Received 2 February 2012 Accepted 6 August 2013 Available online 16 August 2013 Keywords: CEO compensation Media coverage Board Corporate governance
a b s t r a c t This paper investigates the relationship between CEO cash compensation and media coverage of firms, analyst forecasts and board structure using data from the Taiwan Stock Exchange. We find that, other things being equal, CEO cash compensation is much higher for firms with greater media coverage, firms with more positive news, firms with more analyst forecasts, and firms with larger institutional holdings. There is little evidence that board size and board independence affect CEO cash compensation, and CEO duality is negatively associated with CEO cash compensation © 2013 Elsevier B.V. All rights reserved.
1. Introduction Mass media coverage is a major channel of financial information and corporate disclosure. Media coverage often asserts an immense influence on public opinion and investor sentiments. Nowadays, financial media reports are frequently associated with public anger and outcry about corporate fraudulent practices and untruthful financial disclosure. In many cases, media coverage results in severely negative stock market reactions when corporate wrong doings are uncovered by investigative reporters. With the advent of the Internet and 24/7 financial news TV channels, financial media coverage has become a powerful source of information, which often surfaces far ahead of any legally required regulatory corporate reports and disclosures such as SEC requirements or GAAP practices. Fang and Peress (2009) report evidence of a relationship between media coverage and crosssectional expected stock returns. In particular, they find stocks with no media coverage earn higher ∗ Corresponding author. E-mail address: [email protected] (C.-W. Chen). 1042-444X/$ – see front matter © 2013 Elsevier B.V. All rights reserved. http://dx.doi.org/10.1016/j.mulfin.2013.08.003
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returns than stocks with high media coverage. This is sometimes referred to as the “neglected firms” effect, which is similar to the small firm effect, and indicates the result of mispricing due to a lack of information. Dyck et al. (2008) investigate media coverage and its effect on corporate governance on firms in Russia. They find that Anglo-American media coverage increases the probability of a corporate governance violation being reversed. This result is in agreement with similar episodes observed in the U.S. For example, media coverage of activist investors often results in corporate governance changes as well. In a separate strand of research, Chhaochharia and Grinstein (2009) find a significant decrease in CEO compensation for firms which are required by US stock exchanges to strengthen their board oversight. Other papers document evidence that board decisions often strongly affect CEO compensation (see, among others, Fama (1980); Fama and Jensen (1983); Jensen (1993); Hall and Murphy (2003); Bebchuk et al. (2002), and Bebchuk and Fried (2003)). Core et al. (2008) examine the impact of media coverage on CEO compensation after such media releases. They find little evidence that (1) firms respond to negative media coverage by decreasing excessive CEO compensation or (2) that negative media coverage leads to increased CEO turnover. Their findings thereby cast doubt on the notion that media coverage exerts an important influence on corporate governance choices (e.g., Dyck and Zingales (2004); Joe et al. (2009)). Nguyen (2011) investigates the impact of media coverage and positive coverage of CEOs on firm value and CEO compensation among Fortune 500 firms from 1992 and 2002. Nguyen (2011) finds that fortune 500 firms with high levels of CEO media coverage and positive coverage exhibit higher Tobin’s q. Greater media coverage and more positive coverage are associated with higher CEO compensation. There is a large body of literature on board size and firm performance with mixed empirical results. Numerous finance studies have found evidence supporting an agency-theory argument which suggests that smaller boards are better monitors of corporate management (see Yermack (1996); Eisenberg et al. (1998) and Denis and Sarin (1999), among others). Gertner and Kaplan (1996) suggest that large boards are more likely to have coordination problems and potential for free riders, which may lead to inefficiency. Based on a resource dependency perspective, however, other studies have found evidence that large boards perform better (Gales and Kesner (1994), and Dalton et al. (1999)). While the empirical evidence is mixed, it seems clear that board size is a significant factor on the effectiveness of monitoring on corporate management from the board. Ning et al. (2010) provide a good review of the board size literature and find empirical evidence of a mean-reversion pattern in board size. They argue that corporations try to optimise board size to balance between agency costs and resource dependency. Core et al. (2008) and Nguyen (2011) examine the effects of news about CEOs on CEO compensation among U.S. firms. Unlike them, our paper investigates the effects of news about firms on CEO cash compensation among firms listed in the Taiwan Stock Exchange and its over-the-counter market. It also directly examines the potential impact of board structure, analyst forecasts1 , and CEO duality on CEO compensation. Following similar studies of CEO compensation and corporate governance, our model also incorporates other important control variables such as institutional ownership, firm age, firm performance and growth opportunities. We find strong evidence that media coverage of firms is strongly associated with CEO cash compensation, with CEOs of firms with high media coverage receiving substantially higher cash compensation. Firms receiving more positive news also pay greater cash compensation to their CEOs. Analyst forecasts are also positively related to CEO cash compensation. Hartzell and Starks (2003) document a significantly negative relationship between the level of executive cash compensation and institutional ownership in U.S. firms. In contrast, we find a positive relationship between level of CEO cash compensation and institutional ownership in Taiwanese firms. This may reflect the close connection between company executives and the financial service and banking sectors commonly observed in Taiwan.
1 Unlike in the U.S., where the number of analysts following (analyst coverage) a listed firm is available directly, we are unable to obtain analyst coverage, and as a substitute, we use the number of analyst forecasts disclosed in media in a calendar year.
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Prior studies show that small boards and boards with greater percentages of independent members may be more effective monitors since these types of firms perform better. We find that board size and board independence have little effect on CEO cash compensation. CEO duality (CEOs who also serve as the chairman of the board) has a negative effect on CEO cash compensation. Our study is the first to present direct evidence regarding the impact of media coverage of firms, board structure, and analyst forecasts on CEO compensation; in addition, we present new evidence related to the impact of institutional ownership on CEO compensation using data from Taiwan. Our study explores and extends the linkage between CEO compensation and media coverage, analyst forecasts, board structure, CEO duality and institutional ownership. We also call for more research on this topic using data from other countries or regions. 2. Data and key variables Our media coverage data is collected from TEJ (Taiwan Economic Journal Co., Ltd), one of the largest business publications in Taiwan. This publication is comparable to the Wall Street Journal in the U.S. Media coverage is measured by the total number of news pieces about firms over a calendar year. We also collect the good/bad news index from CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. CMoney constructs and reports the good/bad news index value monthly. In our analysis, we use the average monthly positive news index over a calendar year to measure good/bad news and the strength of news about a firm. The results are qualitatively the same when we use the median monthly positive new index. Our sample firms include 1189 non-financial firms listed in the TSE (Taiwan Stock Exchange) and its OTC sections in Taiwan over the period from 2005 to 2008. The sample includes a total of 4430 firm-year observations.2 The financial and accounting variables are collected from TSE financial database, which is comparable to Compustat in the US. Following earlier studies, we measure CEO compensation by three variables: bonuses, salary, and total compensation. We include a set of control variables to separate out associated effects. These control variables include: Number of analyst forecasts. Prior studies have found that firms followed by more analysts perform better and practice less earnings management (see Yu (2008)). We are unable to directly collect data on the number of analysts following listed Taiwanese firms. We use the number of analyst forecasts disclosed in the media in a calendar year as a substitute, since the more the number of analysts following a firm, the greater the number of analyst forecasts are issued. In addition, the number of analyst forecasts can also be considered as an alternative measure of media coverage. CEO duality. Previous studies have found that dual title (CEO who also serves as chairman of the board) is associated with excessive CEO power and low firm performance. Board size. Mixed but statistically significant empirical results have been found in relation to the linkage between board size and firm performance or firm governance. Percentage of independent directors. Associated with better firm performance or governance. Institutional ownership. Institutional shareholders are associated with better firm performance or governance. Return on equity. This is a measure of firm performance, controlling for performance-driven CEO compensation. Market to book ratio. This variable controls for market valuation effect, and also serves as a proxy for firm growth potential. As firms with more growth opportunities may be more likely to use noncash compensation, we expect a negative relationship between market to book ratio and level of cash compensation to CEOs. Sales. This variable is measure of firm size which controls for size-related CEO compensation difference. 2 We use a natural logarithm of sales to measure firm size in regressions. One firm had 0 sales in Year 2008 and the same firm generated sales of NT$ 219,264,000 in 2007. We drop the observation in 2008. Our results are qualitatively similar when a natural logarithm of asset value is used to proxy for firm size. Our sample size is decreased to 4389 after dropping the firm-year observations without good/bad news index values.
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Table 1 Summary statistics.
Media coverage Good/bad news index (%) Number of analyst forecasts Bonuses (NT$000) Salary (NT$000) Total cash compensation (NT$000) CEO duality dummy Board size Independent director(s) Board independence (%) Institutional ownership (%) Market to book value ratio Return on equity (%) Return on assets (%) TSE dummy Firm age since listed Sales (NT$000,000) Total assets (NT$000,000)
N
Mean
5%
Median
95%
Std. Dev.
4430 4389 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430 4430
206 4.73 3.43 3097 8968 12,065 0.30 6.80 0.98 15.08 35.68 1.34 16.31 3.55 0.56 8.52 11,600 13,000
54 −1.36 0 0 0 0 0 5 0 0 5.28 0.62 −25.09 −15.58 0 1 278 577
141 3.53 3 579 6225 7581 0 7 0 0 31.73 1.05 11.85 4.73 1 6 2306 3113
568 14.62 7 13,285 27,730 38,298 1 11 3 40 77.91 2.85 68.90 19.10 1 26 37,800 45,500
225 5.04 2.28 8534 11,040 16,983 0.46 2.21 1.07 16.58 22.52 1.33 33.74 13.26 0.50 8.00 53,100 44,700
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on a board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. Return on assets is the income before interests and depreciations divided by total assets. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ).
Firm age. Older firms may be more established and reputable. CEOs in more reputable firms may receive higher compensation. TSE dummy. To control for potential effect due to stock exchange listing, versus over the counter, we use a dummy variable for Taiwan Stock Exchange listed stocks. Following similar empirical studies, we also use year and industry dummy variables to control for the impact on CEO compensation of year and industry. 3. Empirical results In terms of methodology, we apply both univariate analyses and multivariate regression models in analyzing the effect of media coverage on CEO compensation. Table 1 shows summary statistics for our sample firms. CEOs in Taiwan receive, on average, total compensation of NT$12,065,000, with mean bonuses of about NT$3,097,000. Bonuses account for about 25% of the total compensation package. This is a substantially lower fraction in comparison to US CEO compensation patterns. An average publicly traded Taiwanese firm receives 206 pieces of media coverage in the Taiwan Economic Journal, with 568 pieces for firms in the 95th percentile, and 54 for firms in the 5th percentile, exhibiting a large range of media coverage among the sample firms. The good/bad news index ranges from −1.36 (5th percentile) to 14.62 (95th percentile), and has an average value of 4.73, suggesting that on average news on firms in Taiwan tends to be slightly positive. Number of analyst forecasts also varies greatly, ranging from 7 (95th percentile) to 0 (5th percentile), with a mean of 3.43. Board size ranges from 11 board members at the 95th percentile to 5 members at the 5th percentile. The mean board size is 6.8 (median is 7). These are much lower numbers in comparison to those from the U.S. Both of the above two variables reflect the emerging market nature of the Taiwanese economy. The number of independent directors is also low relative to the U.S., with a mean of only 1 independent director
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Table 2 Univariate test results. >Median
≤Median
(1)
(2)
(1)–(2)
Panel A: Media coverage Bonuses (NT$000) Salary (NT$000) Total compensation N
4753 12,066 16,819 2203
1459 5903 7362 2227
3294a 6163a 9457a
Panel B: Positive news index Bonuses (NT$000) Salary (NT$000) Total compensation N
4704 11,785 16,489 2235
1460 6100 7560 2195
3244a 5685a 8929a
Panel C: Number of analyst forecasts Bonuses (NT$000) Salary (NT$000) Total compensation N
4554 11,479 16,033 2145
1729 6611 8340 2285
2825a 4868a 7693a
Panel D: Board size Bonuses (NT$000) Salary (NT$000) Total compensation N
5179 12,244 17,421 935
2540 8091 10,631 3495
2639a 4152a 6790a
Panel E: Board independence Bonuses (NT$000) Salary (NT$000) Total compensation N
2851 8931 11,782 2175
3334 9003 12,338 2255
−483b −72 −556
Panel F: CEO duality Bonuses (NT$000) Salary (NT$000) Total compensation N
2423 8326 10,748 1309
3380 9237 12,617 3121
−957a −911a −1869a
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Board independence is the ratio of the number of independent director(s) to board size multiplied by 100. All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 10%.
in each board (95th percentile is still low at 3). Board independence is measured by the percentage of independent board members on a board, which is calculated by the number of independent board members divided by the total number of board members. On average, only about 15 percent of board members in Taiwanese firms are independent. This reflects the common Asian cultural practice of selecting directors with close ties to the CEO or to the founding family which usually retains large if not controlling ownership. Institutional ownership varies from about 78% (95th percentile) to about 5% (5th percentile), with a mean of about 36%. Our regression analysis later shows a substantial positive relationship between institutional ownership and CEO compensation, which could also reflect the common close relationship between corporate executives and the banking/finance industry. 30 percent of the firms have dual-title CEOs, indicating that a large number of CEOs have potential agency problems. Table 2 reports test results for our univariate comparisons. We divide our sample into two subsamples according to the median value of several of the key variables, and then compare the mean
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CEO compensations between the sub-samples with the above- and below-median value of the control variables. These comparisons give a clear first indication of what variables are driving differences in CEO compensation. Our first and foremost key variable is media coverage. In Panel A, average total CEO compensation of firms with higher than average media coverage is more than twice that of CEOs of firms with below average media coverage. This is a very substantial difference. The difference in bonuses is especially pronounced; it is more than three times higher for the high media coverage sub-sample. Almost the same degree of difference can be observed on the effect of good/bad news index and number of analyst forecasts, as reported in Panel B and Panel C respectively. In Panel D, firms with above average board size pay their CEO almost twice as much in bonuses as firms with below average board size. The salaries they pay are more than 50% higher. The difference in total CEO compensation is more than 70%. This can be interpreted as evidence of inefficiency in larger boards. Corresponding to the free-riding and coordination cost issues, large boards are less efficient in monitoring firms. In this instance, this type of inefficiency affects CEO compensation. Panel E examines the impact of board independence on CEO cash compensation. Firms with an above average percentage of independent board members (associated with better monitoring) pay their CEO less than firms with a lower percentage of independent board members. However, the difference is quite small and only statistically significant for bonuses. This variable is insignificant for both salary and total CEO compensation. Finally, in Panel F, CEOs with dual titles (the CEO also acts as chairperson of the board) (this is found to be associated with worse firm performance due to excessive CEO power) receive lower cash compensation. This result is in fact surprising because the conventional wisdom is that powerful CEOs (here, the ones with dual titles) benefit themselves at the expense of the company and the shareholders. We conjecture that if CEOs with dual titles receive too much cash compensation, attention will be more easily caught, thereby subjecting these CEOs to more criticism. Therefore, CEOs with dual titles prefer greater equity based compensation, which is less overt. Table 3 reports the correlations among key variables. Confirming the univariate test results, bonuses, salary and total cash compensation are all positively and significantly correlated with media coverage, good/bad news index, number of analyst forecasts and board size. However, the above variables are all negatively correlated with CEO duality. Board independence has small negative correlation with bonuses, salary and total cash compensation. Only the correlation with bonuses shows weak significance. Table 3 also shows that CEO compensations are significantly and positively related to return on equity, natural logarithm of sales (log of sales in short thereafter), firm age and TSE dummy. Correlations between CEO compensation and media coverage, CEO compensation and good/bad news index and CEO compensation and log of sales are larger than correlations between CEO compensation and other variables, indicating media coverage, good/bad news index, and log of sales may have greater impact on CEO compensation than other variables. Table 4 reports the OLS regression results with robust error.3 The results confirm our earlier findings in the univariate tests and correlation analysis. In particular, media coverage and good/bad news index are found to have a highly significant and positive effect on bonuses, salary and total CEO cash compensation. Coefficients of the number of analyst forecasts are all positive, but only the coefficients in Column 3 and 5 are significant. Board size and board independence have no significant impact on CEO cash compensation. Coefficients of CEO duality dummies are all negative, while only the coefficients in Column 1 and Column 5 are significant, suggesting that after controlling for impact of media coverage and other variables (not including good/bad news index), CEOs in firms with CEO duality may receive less bonuses and less total cash compensation. This evidence does not reject the potentially more severe agency problems in firms with CEO duality. Instead, since cash compensation is overt and easily attracts attention and criticism, firms with more severe agency problems might pay greater equity-based compensations to their CEOs. Unlike the negative relationship between institutional
3 The Breusch–Pagan/Cook–Weisberg test for heteroskedasticity shows that the error of OLS regression does not have constant variance, so we use OLS regression to control for the heteroskedasticity of the error term.
440
Table 3 Correlation. Bonuses 0.50a 0.83a 0.39a 0.28a 0.18a
Total cash compensation
Media coverage
0.90a 0.48a 0.33a 0.24a
0.51a 0.35a 0.25a
0.57a 0.40a
−0.04b 0.14a
−0.05a 0.15a
−0.01 0.18a
Board independence
−0.05a 0.13a −0.02c
−0.02
−0.02
Institutional ownership Return on equity Market to book value Log of sales Firm age TSE dummy
0.20a 0.15a −0.03c 0.39a 0.13a 0.18a
0.20a 0.11a −0.02 0.49a 0.12a 0.23a
0.23a 0.15a −0.02 0.51a 0.14a 0.24a
−0.003 0.32a 0.36a 0.10a 0.57a 0.14a 0.23a
CEO duality Board size
Good/bad news index
Number of analyst forecasts
CEO duality
−0.04b 0.13a 0.04b
−0.06a 0.14a 0.13a
−0.13a
0.24a 0.44a 0.13a 0.47a 0.09a 0.23a
0.26a 0.47a 0.07a 0.45a −0.05a 0.13a
Board size
Board independence
Institutional ownership
Return on equity
Market to book value
Logarithm of sales
−0.03b 0.17a 0.10a −0.09a −0.50a −0.31a
0.29a 0.06a 0.34a 0.14a 0.21a
0.13a 0.28a −0.14a 0.06a
−0.10a −0.13a −0.10a
0.21a 0.41a
Firm age
0.41a
−0.001 −0.12a −0.08a 0.05a −0.12a −0.007 −0.02
−0.11a 0.20a 0.02 −0.04a 0.27a 0.22a 0.15a
0.45a
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. Return on assets is the income before interests and depreciations divided by total assets. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
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Salary Total cash compensation Media coverage Good/bad news index Number of analyst forecasts
Salary
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Table 4 OLS regression results controlling for heteroskedasticity of regression errors.
Media coverage
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index Number of analyst forecasts CEO duality Board size Board independence Institutional ownership Return on equity Market to book value ratio Log of Sales Firm age TSE dummy Constant Year and industry dummies R-square N
(2)
10.36a (5.65)
73.28 (1.08) −369.43c (−1.72) 43.10 (0.55) 7.64 (0.85) 14.80a (2.90) −6.30 (−1.21) −85.49 (−1.39) 1161.81a (9.03) 24.44 (1.18) 284.58 (1.56) −15,706a Yes 0.221 4430
(4)
14.50a (8.72) 176.85a (3.75) 78.71 (1.18) −103.54 (−0.49) 87.86 (1.10) 3.98 (0.43) 22.92a (4.22) −1.18 (−0.19) 2.40 (0.05) 1606.88a (10.38) 67.55a (3.04) 59.67 (0.32) −22,363a Yes 0.185 4389
144.12c (1.66) −384.62 (−1.50) 27.01 (0.39) −6.96 (−0.68) 10.80 (1.41) −42.24a (−5.38) −170.71b (−1.97) 2296.56a (16.32) 64.67b (2.77) 1363.51a (5.18) −31,966a Yes 0.369 4430
(6)
24.87a (8.37) 191.05a (4.37) 139.22 (1.49) −95.50 (−0.39) 85.24 (1.18) −7.51 (−0.70) 23.90a (2.93) −31.43a (−2.90) −20.32 (−0.25) 3010.20a (16.86) 125.22a (4.80) 1204.37a (4.31) −42494a Yes 0.321 4389
217.40c (1.72) −754.05b (−2.00) 70.11 (0.56) 0.69 (0.04) 25.60b (2.40) −48.54a (−4.62) −256.21c (−1.91) 3458.37a (15.01) 89.11b (2.40) 1648.09a (4.40) −47672a Yes 0.383 4430
367.90a (4.84) 217.93 (1.60) −199.04 (−0.54) 173.10 (1.34) −3.54 (−0.21) 46.82a (4.05) −32.61b (−2.16) −17.91 (−0.15) 4617.08a (15.79) 192.77a (4.90) 1264.05a (3.15) −64857a Yes 0.327 4389
Media coverage represents the total number of news stories about a firm during a calendar year. The good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on a board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by the book value of equity. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
ownership and executive compensation in American firms reported by Hartzell and Starks (2003), Table 3 shows a positive relationship between CEO compensation and institutional ownership, indicating that institutional investors may not be effective monitors in Taiwan, possibly reflecting close ties between CEOs and the financial service industry. This is a fairly common cultural practice found in many emerging Asian-Pacific markets. Consistent with prior studies, our results also show that CEOs in larger firms and/or older firms receive greater compensation. All the coefficients of market to book value ratio are negative in all regressions. However, in only a few regressions, the impact of market to book value ratio on CEO compensation is significant. Market to book value ratio is commonly used as a proxy for a firm’s growth opportunities. Firms with higher market to book value ratio have more growth opportunities and need more cash. Therefore, these firms would be more likely to
442
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Table 5 Fixed-effect model regression results.
Media coverage
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index Number of analyst forecasts CEO duality Board size Board independence Institutional ownership Return on equity Market to book value ratio Log of sales Firm age TSE dummy Constant Year dummies Industry dummies Model F-stat R-square overall N
(2)
2.30b (2.23)
122.15c (1.81) −420.13 (−1.18) 270.71b (2.02) 3.70 (0.25) 17.98 (1.49) 11.05b (2.06) −70.36 (−0.71) 663.81a (2.63) 843.51a (9.49) −248.50 (−0.26) −17,297a Yes No 12.31 0.054 4430
(4)
83.31a (2.66) 138.83b (2.06) −409.47 (−1.14) 278.84b (2.07) 4.32 (0.29) 18.70 (1.54) 7.58 (1.35) −83.35 (−0.83) 653.19b (2.58) 809.56a (8.81) −213.93 (−0.23) −16,810a Yes No 12.42 0.053 4389
75.54 (1.21) −213.88 (−0.65) 44.69 (0.36) −0.43 (−0.03) −6.44 (−0.58) −7.86 (−1.59) −32.51 (−0.35) 510.77b (2.19) 716.60a (8.72) −812.91 (−0.94) −5880c Yes No 14.76 0.074 4430
(6)
8.67a (5.49)
6.37a (6.69) 84.01a (2.91) 128.76a (2.08) −197.51 (−0.60) 35.42 (0.29) −0.67 (−0.05) 1.00 (0.09) −9.24c (−1.79) −20.45 (−0.22) 610.38a 2.62) 679.69a (8.03) −709.38 (−0.82) −6534c Yes No 11.53 0.049 4389
197.69c (1.91) −634.01 (−1.16) 315.40 (1.54) 3.27 (1.54) 11.54 (0.62) 3.20 (0.39) −102.87 (−0.67) 1174.58a (3.03) 1560.11a (11.44) −1061.41 (−0.74) −23,177a Yes No 19.83 0.084 4430
167.32a (3.48) 267.59b (2.59) −606.98 (−0.27) 314.26 (1.52) 3.65 (0.16) 19.70 (1.06) −1.66 (−0.19) −103.79 (−0.68) 1263.57a (3.25) 1489.24a (10.57) −923.31 (−0.64) −23,344a Yes No 18.09 0.069 4389
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. TSE dummy is 1 if the observation is traded in the Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from Taiwan Economic Journal (TEJ). a b c
Indicate significance levels at 1%. Indicate significance levels at 5%. Indicate significance levels at 10%.
use equity-based compensation to incentivize their CEOs. In Taiwan, firms traded in TSE are larger and older. These firms also receive greater media and analyst attention than firms traded in the OTC market. Moreover, CEOs in firms traded in TSE receive greater compensation, so the coefficients of TSE dummy are significantly positive. The return to equity control variable shows negative and significant coefficients for some of the regressions. We conjecture that as a firm’s return on equity increases, the firm might be more likely to increase equity-based compensation to their CEO. Cash compensation may not change much and sometimes may even decrease if equity-based compensation increases significantly. Therefore, we may observe negative and inconsistent relationships between ROE and cash compensation. Daily et al. (1998) find that although ROE tends to impact CEO compensation,
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Table 6 OLS regression results using one year-lagged values of press coverage, good/bad news index, number of analyst forecasts, and return on equity.
Media coverage−1
Dependent variable: bonuses
Dependent variable: salary
Dependent variable: total cash compensation
(1)
(3)
(5)
Good/bad news index−1 Number of analyst forecasts−1 CEO duality Board size Board independence Institutional ownership Return on equity−1 Market to book value Log of Sales Firm age TSE dummy Constant Year and industry dummies R-square N
(2)
12.97a (5.36)
36.68 (0.39) −616.14b (−2.19) 85.78 (0.81) 8.66 (0.76) 19.26a (2.79) −7.28 (−0.92) −17.76 (−0.23) 1278.59a (7.62) 24.65 (0.89) 395.32c (1.69) −16,162a Yes 0.240 3241
(4)
17.68a (8.55) 221.42a (3.87) 25.98 (0.26) −296.34 (−1.09) 153.15 (1.44) 6.63 (0.54) 29.31a (4.10) −2.04 (−0.20) 44.42 (0.60) 1798.51a (9.71) 70.45b (2.51) 122.62 (0.50) −25,068a Yes 0.197 3212
98.98 (0.88) −609.12b (−1.99) 26.55 (0.31) −1.66 (−1.04) 14.67 (1.57) −41.26a (−3.39) −96.92 (−0.84) 2276.72a (13.81) 60.45b (2.01) 1342.25a (4.62) −28,869a Yes 0.396 3241
(6)
30.65a (8.17) 174.17a (3.28) 89.56 (0.72) −195.25 (−0.65) 119.32 (1.32) 1.43 (0.11) 30.84a (3.03) −27.19 (−1.62) 23.18 (0.20) 3117.82a (14.89) 128.18a (3.97) 1339.08a (3.95) −42,522a Yes 0.332 3212
135.65 (0.83) −1225.27b (−2.58) 112.33 (0.69) 6.99 (0.36) 33.93b (2.52) −48.54a (−3.08) −114.69 (−0.67) 3555.31a (12.62) 83.10c (1.86) 1827.57a (3.97) −45,031a Yes 0.383 3241
395.58a (4.21) 115.53 (0.62) −491.59 (−1.05) 272.47 (1.61) 8.07 (0.38) 60.15a (4.08) −29.23 (−1.23) 67.60 (0.40) 4916.32a (14.04) 198.64a (4.04) 1461.69a (2.89) −67,589a Yes 0.336 3212
Media coverage represents the total number of news stories on a firm during a calendar year. Good/bad news index is constructed by CMoney–Institutional Investors Investment Decision Support System. The value of the good/bad news index ranges from −100% to +100%. A positive value indicates good news, and a negative value indicates bad news. The absolute value of the index reflects the strength of the news. Total compensation measured in thousands of New Taiwanese dollars is the sum of bonuses and salary. CEO duality is a dummy variable; it is 1 if the CEO is also the chairman of the board and 0 otherwise. Board size is the number of board members. Independent director(s) indicates the number of independent director(s) on board. Board independence is the percentage of board members serving as independent directors, calculated as the ratio of the number of independent director(s) to the board size multiplied by 100. Institutional ownership is the percentage of shares held by institutions. Market to book ratio is the market value divided by total assets. Market value is the total debt plus the market value of equity. Return on equity is the net income scaled by book value of equity. TSE dummy is 1 if the observation is traded in Taiwan Stock Exchange (TWSE) during the sample year and 0 otherwise. All variables are extracted from the Taiwan Economic Journal (TEJ). All variables are extracted from the Taiwan Economic Journal (TEJ). a Indicate significance levels at 1%. b Indicate significance levels at 5%. c Indicate significance levels at 10%.
the direction of ROE’s impact is inconsistent across years and compensation measures. Due to data limitations, we are not able to test this possibility here. It may be an interesting question for future research to examine the impact of ROE on CEO compensation structure. To control for the possible impact of unobservable firm characteristics on CEO compensation, we also apply the fixed effect model. The fixed-effect regression results are reported in Table 5. Media coverage, good/bad news index and log of sales continue to show positive and significant impact on CEO compensation. The impact of number of analyst forecasts becomes more significantly positive, with coefficients of number of analyst forecasts being significantly positive in five of the six fixed-effect model regressions. Board size becomes significantly related to bonuses. Impact of board independence remains insignificant.
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As a robustness test, to mitigate the potential endogeneity problem (firms that pay greater cash compensation to their CEOs may receive more media coverage) and the evidence that Taiwanese firms tend to compensate their CEOs based on the prior year’s firm performance (Yu (2010)), we use one year-lagged media coverage, one year-lagged good/bad news index, one-year lagged number of analyst forecasts, and one year-lagged return on equity to explain the variations in the current year’s compensation, as seen in Table 6. The results are qualitatively similar to results reported in Table 4. In addition, we also use return on assets as a measure of firm performance and log of total assets as a proxy for firm size. The results remain qualitatively the same and are not reported. 4. Conclusions CEO compensation has come under close scrutiny as the gap between executive compensation and average worker compensation continues to widen. The recent financial crisis has especially drawn investors’ attention to executive compensation as corporations have continued to offer their executives high compensation even when firm performance has not been good. This paper focuses on one particular area of this complex issue by investigating whether and how the amount of news on firms (media coverage), good/bad news on firms, analyst forecasts and board structure affect the level of CEO cash compensations, using a sample of Taiwanese publicly traded firms. Core et al. (2008) find little evidence that negative media coverage of CEOs and on their compensations affect either subsequent CEO compensation or CEO turnover among U.S. firms. We find a significant and positive relationship between CEO compensation and media coverage of firms, and between CEO compensation and good/bad news about firms. We find some evidence that the number of analyst forecasts is positively associated with CEO cash compensation. In addition, we find a significant relationship between CEO compensation and other governance variables such as CEO duality and institutional ownership. In contrast to the negative relationship between executive compensation and institutional ownership among American firms found in Hartzell and Starks (2003), we find that CEOs in Taiwanese firms with greater institutional ownership receive higher compensation. Our study contributes to the literature by providing significant empirical evidence related to this important corporate governance issue by using an international sample of listed firms in Taiwan. Our study is the first to investigate the potential impact of media coverage, board structure and analyst forecasts on CEO compensation. We present new evidence of the impact of institutional ownership on CEO compensation. Our paper highlights the effect of media coverage on CEO compensation, and shows that media coverage can be and should be considered a meaningful and viable corporate governance instrument. For future studies, it will be interesting to investigate the impacts of media coverage and board structure on CEO compensation structure and pay-for-performance sensitivity. In addition, many large Taiwanese firms used to be and many continue to be family owned (or have the founding family as a majority or minority owner). Family ownership or, by extension, managerial ownership can be an important factor in the determination of CEO compensation. This would be an interesting additional variable for future investigation.4 References Bebchuk, L., Fried, J., 2003. Executive compensation as an agency problem. J. Econ. Perspect. 17, 71–92. Bebchuk, L., Fried, J., Walker, D., 2002. Managerial power and rent extraction in the design of executive compensation. University of Chicago Law Review 69, 751–846. Chhaochharia, V., Grinstein, Y., 2009. CEO compensation and board structure. J. Finance 64, 231–261. Core, J., Guay, W., Larcker, D., 2008. The power of the pen and executive compensation. J. Financ. Econ. 88, 1–25. Daily, C., Johnson, J., Ellstrand, A., Dalton, D., 1998. Compensation committee composition as a determinant of CEO compensation. Acad. Manage. J. 41, 209–220. Dalton, D., Daily, C., Johnson, J., Ellstrand, A., 1999. Number of directors and financial performance: a meta-analysis. Acad. Manag. J. 42, 674–686. Denis, D., Sarin, A., 1999. Ownership and board structures in publicly traded corporations. J. Financ. Econ. 52, 187–223.
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We thank a reviewer for pointing this out.
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