Media Disclosure, Board Structure and CEO Compensation: Evidence from Taiwan
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1 Media Disclosure, Board Structure and CEO Compensation: Evidence from Taiwan Bingsheng Yi, Chia-Wei Chen and Barry Lin* Abstract This paper reports empirical evidence in the relationship between media coverage, board structure and CEO compensation using data from Taiwan Stock Exchange. We find that CEO compensation is much higher for firms with more press coverage, firms with more analyst coverage, firms with larger board, and larger institutional holdings. CEO compensation is lower for firms with higher percentage of independent board members and for firms with CEO who also serves as the Chairman of the board. We controlled for potential endogeneity problem, and the results remain the same. Our findings confirm and extend results found by other papers in the complex relationship among board structure, CEO duality, CEO compensation, and press coverage. *Bingsheng Yi is at Californian state University Dominguez Hills, Chia-Wei Chen is at Tunghai University, Taiwan, and Barry Lin is at Simmons College.
2 1. Introduction Mass media coverage is a major channel of financial information and often asserts an immense influence to public opinion ad emotion. In recent time, press reporting often is associated with public anger and outcry in corporate fraudulent practices and untruthful financial disclosure. Lily and Peress (2009) reports evidence of a relationship between media coverage and cross-sectional expected stock returns. In particular, they found stocks with no media coverage earn higher returns than stocks with high press coverage. Dick, Volchkova and Zingales (2008) investigates media coverage and its effect on corporate governance on firms in Russia. They find that Anglo-American press coverage increases the probability that a corporate governance violation is reversed. In a separate strand of research, Chhaochharia and Grinstein (2009) find a significant decrease in CEO compensation for firms which were required by US stock exchanges to strengthen their board oversight. Other papers documented evidence that board decisions often affect CEO compensation strongly (see, among others, Fama (1980), Fama and Jensen (1983), Jensen (1993), Hall and Murphy (2003), and Bebchuk and Fried (2003, 2004)).) This paper uses a sample of firms listed in Taiwan Stock Exchange and investigates the effect of the degree of media coverage on CEO compensation, subject to other important variables such as board structure, analyst coverage, CEO duality, and institutional ownership. We find strong evidence that media coverage is strongly associated with CEO compensation, with CEO of firms with high coverage receiving substantially higher compensation. Analyst coverage and institutional ownership both have a similar positive effect on CEO compensation, so is board size, while percentage independent board member has an opposite effect. CEO duality (CEO who also serves as the Chairman of the board) has a negative effect on CEO compensation. Our results broadly mesh with other studies on CEO compensation, board structure, and other studies on corporate governance. 2. Data and empirical results Our press coverage data is collected from TEJ (Taiwan Economic Journal Co., Ltd), one of the largest business publications. Sample firms include all firms listed in TSE and OTC in Taiwan from 2005 to Table I reports summary statistics for our sample firms. CEOs in Taiwan receive, on average, NT$12,062,000 of total compensation, with bonus accounting for about 75% of the package. An average firm receives 206 times of press coverage, with 568 times for the 95 percentile, and 54 times for the 5% percentile, thus exhibiting a large range of press coverage among the firms. Table II reports test results for our univariate comparisons. Average CEO compensation of firms with higher than average press coverage is almost four times higher than that of firms with below average press coverage, which is a very substantial difference. Almost the same degree of difference can be seen on the effect of analyst coverage. Firms with above average board size (found to be less efficient in monitoring) pay their CEO almost twice as much as firms with below average board size. Firms with above average % of independent board members (associated with better monitoring) pay their CEO less than firms with lower % of independent board members. Finally, CEOs with dual titles (found to be associated with worse firm
3 performance) receive lower compensation. Table III and IV report results of multivariate tests with OLS and fixed-effect regressions. These results confirm our earlier findings in the univariate tests. In particular, press coverage is found to have a highly significant and positive effect on CEO compensation. Table I Summary Statistics Mean 5% Percentile Median 95% Percentile Standard deviation Panel A: Information Disclosure Press coverage Number of analyst forecasts Bonus (NT$000) 3, ,285 8,533 Salary (NT$000) 8, ,225 27,730 8,966 Total compensation (Bonus + Salary, 16,982 12, ,579 38,298 NT$000) CEO duality dummy Board size Independent director(s) Proportion of independent directors in the board (%) Institutional ownership (%) Market to book ratio Return on equity (%) Return on assets (%) TSE dummy Firm age since listed in TSE or OTC Sales (NT$000) 11, ,303 37,800 53,000 Total assets (NT$000) 13, ,111 45,500 44,700
4 Table II Univariate Tests Comparison of average CEO compensation between different groups: The whole sample firms are classified into two groups according to whether a sample firm s value in press coverage (number of analyst forecasts, board size, the proportion of independent board members, and institutional ownership) exceeds its median value or not respectively. Panel A: CEO compensation and press Coverage (2) (2) Bonus (NT$000) 4,753 1,458 3,295 a Salary (NT$000) 12,066 5,901 6,165 a Total compensation 16,819 7,359 9,460 a N 2,203 2,228 Panel B: CEO compensation and number of analyst coverage (2) (2) Bonus (NT$000) 4,554 1,728 2,826 a Salary (NT$000) 11,479 6,608 4,871 a Total compensation 16,033 8,337 7,696 a N 2,145 2,286 Panel C: CEO compensation and board size (2) (2) Bonus (NT$000) 5,179 2,539 2,640 a Salary (NT$000) 12,243 8,089 4,154 a Total compensation 17,422 10,628 6,794 a N 935 3,396 Panel D: CEO compensation and proportion of independent board members in the board (2) (2) Bonus (NT$000) 2,850 3, c Salary (NT$000) 8,927 9, Total compensation 11,777 12, N 2,176 2,255 Panel E: CEO compensation and CEO duality CEO dummy =1 CEO dummy =0 (2) (2) Bonus (NT$000) 2,421 3, a Salary (NT$000) 8,320 9, a Total compensation 10,741 12,616-1,875 a N 1,310 3,121 a indicates significance at 1%, b indicates significance at 5%, c indicates significance at 10%.
5 Table III OLS Regression Results Independent variables Dependent variable Bonus Salary Total compensation Press coverage a a a (5.42) (10.24) (9.51) Number of analyst coverage forecasts a a a (4.62) (6.68) (7.10) CEO duality a a a (-2.75) (-3.13) (-3.63) Board size b b (1.40) (2.34) (-2.19) % of Independent directors in the board (0.24) (-1.40) (0.44) Institutional ownership a a a (4.71) (2.86) (3.77) Return on equity a a (-0.96) (-5.37) (-4.42) Market to book value a a a (-2.83) (-3.89) (-3.67) Sales e (1.33) (0.99) (1.23) Firm age a a (1.47) (2.77) (2.70) TSE dummy a a a (5.30) (10.23) (9.74) Year dummies Yes Yes Yes Industry dummies Yes Yes Yes R-square Number of observations a indicates significance at 1%, b indicates significance at 5%, c indicates significance at 10%.
6 Table IV Fixed Effect Model Regression Results Independent variables Dependent variable Bonus Salary Total compensation Press coverage a 6.38 a (1.06) (5.36) (3.93) Number of analyst coverage forecasts b b (2.23) (1.57) (2.41) CEO duality (-1.17) (-0.63) (-1.14) Board size c (1.88) (0.22) (1.36) % of Independent directors in the board (-0.08) (-0.36) (-0.27) Institutional ownership (1.55) (-0.53) (0.69) Return on equity b (2.38) (-1.37) (0.73) Market to book value (-0.30) (0.01) (-0.19) Sales a a a (5.06) (4.97) (6.31) Firm age a a a (9.51) (4.97) (11.45) TSE dummy (-0.08) (-0.77) (-0.52) Year dummies Yes Yes Yes Industry dummies No No No Model F-stat R-square overall Number of firms Number of observations a indicates significance at 1%, b indicates significance at 5%, c indicates significance at 10%.
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