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Journal of Regulatory Economics

, Volume 33, Issue 1, pp 55–86 | Cite as

Founders versus non-founders in large companies: financial incentives and the call for regulation

  • Darius Palia
  • S. Abraham Ravid
  • Chia-Jane Wang
Original Article

Abstract

This paper is intended to question some of the premises in the ever increasing calls to regulate executive pay. We focus on founders, and extend Shleifer and Vishny’s (1989, Journal of Political Economy, 94, 461–488) manager-specific investments model by explicitly modeling managerial effort and pay performance sensitivity. Tests of this model on a data set of large companies, controlling for the endogeneity of managerial compensation, indicate that founders tend to be less responsive to performance incentives and generally more entrenched. At the same time, founders’ led firms are more valuable, supporting our predictions. This suggests that for founders, regulation of compensation may not be very effective.

Keywords

Founder Management compensation 

JEL Classifications

G32 G34 

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Copyright information

© Springer Science+Business Media, LLC 2007

Authors and Affiliations

  • Darius Palia
    • 1
  • S. Abraham Ravid
    • 1
    • 2
  • Chia-Jane Wang
    • 3
  1. 1.Rutgers Business School, Newark and New BrunswickNewarkUSA
  2. 2.Johnson School of ManagementCornell UniversityIthacaUSA
  3. 3.Manhattan CollegeRiverdaleUSA

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