Journal of Financial Economics 88 (2008) 1–25
The power of the pen and executive compensation$
John E. Corea, Wayne Guaya,Ã, David F. Larckerb
The Wharton School, University of Pennsylvania, Philadelphia, PA 19104, USA b
Graduate School of Business, Stanford University, Stanford, CA 94305, USA
Received 28 October 2005; received in revised form 20 March 2007; accepted 4 May 2007 Available online 5 December 2007
We examine the press’ role in monitoring and inﬂuencing executive compensation practice using more than 11,000 press articles about CEO compensation from 1994 to 2002. Negative press coverage is more strongly related to excess annual pay than to raw annual pay, suggesting a sophisticated approach by the media in selecting CEOs to cover. However, negative coverage is also greater for CEOs with more option exercises, suggesting the press engages in some degree of ‘‘sensationalism.’’ We ﬁnd little evidence that ﬁrms respond to negative press coverage by decreasing excess CEO compensation or increasing CEO turnover.
r 2007 Elsevier B.V. All rights reserved.
JEL classiﬁcations: G32; G34; J33; M41
Keywords: Press; Media; Executive compensation; Corporate governance
With the possible exception of major accounting frauds (e.g., WorldCom, Enron, etc.), there are few topics that are more pervasive and produce bigger headlines in the business press than executive compensation. The debate about executive compensation tends to focus on the overall level of compensation (e.g., relative to workers in the US or to executives in other countries), the rate of increase (e.g., relative to inﬂation or stock price returns), and the form of payment (e.g., stock options). Although there is extensive academic research on the determinants of executive compensation, there is little empirical evidence on the role of the popular and business press as a potential monitor of executive pay (e.g., see Zingales, 2000; Bebchuk and Fried, 2004). The objective of our study is to provide insight into three questions: (1) What decision model does the media use to select chief executive ofﬁcers (CEOs) for coverage about their compensation, (2) What determines the proportion of that coverage that is negative-toned, and (3) Do ﬁrms and managers ﬁnd this attention $
We thank Greg Miller, seminar participants at Stanford University, and an anonymous referee for their helpful comments. We also thank Jihae Wee for excellent research support, and appreciate ﬁnancial support from the Wharton School of the University of Pennsylvania and the Graduate School of Business at Stanford University. ÃCorresponding author.
E-mail address: firstname.lastname@example.org (W. Guay).
0304-405X/$ - see front matter r 2007 Elsevier B.V. All rights reserved. doi:10.1016/j.jﬁneco.2007.05.001
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J.E. Core et al. / Journal of Financial Economics 88 (2008) 1–25
sufﬁciently costly that they respond by making changes to their compensation or employment practices? Empirical evidence on these research questions provides insight into the role of the press in monitoring and inﬂuencing executive compensation practice.
We examine a large sample of ExecuComp CEOs and an extensive collection of more than 11,000 press articles about CEO compensation from 1994 to 2002. Using an iterative key word search procedure, we partition the press articles based on whether they have a negative tone. Thus, for each CEO, in each year, we obtain a measure of the number of compensation articles and the fraction of these articles with a negative tone. We use this data to provide evidence on the press’ decision model and on the effect of press coverage on ﬁrms’ actions.
Not surprisingly, the press chooses to cover CEOs with high total annual pay. We also ﬁnd that in deciding which CEOs to cover, the press does not appear to discriminate between CEOs that receive high expected pay versus...