b) Firm performance depends on the actions of the CEO and on random factors which are split into two components: those that can be observed by shareholders and those that cannot. Performance is typically measured either as changes in accounting profits or stock market returns. The regression analysis will factors in the independent variables which must be available regardless of the other factorsc) Within the agency framework, most of the empirical literature estimates an equation form. These includes several factors which include; CEO compensation in the firm, time, firm fixed effects, time fixed effects and firm (and CEO) specific variables such as tenure or firm size, performance measure and the strength of the pay for performance relationship. This cannot be realized in such a limited time span and may require more time for the results to be realized. In the event that the model is a for the two year data, the empirical literature will factor in the issue of time.d) The differences between the different variables will be clearly outlined with difference in time. Ideally, the compensation in a year would include the change in value of unexercised options granted in previous years. Such a calculation requires data on the accumulated stock of options held by the CEO each year. Consequently, the compensation measure will include the component of the change in wealth.e) The basic idea is that the mean performance in the rest of the industry may actually provide some information about the CEOs effort to attenuate or strengthen the level of competition in that industry. For example, if product market competition in an. Effects of Decriminalizing Illicit Drugs.
ReferencesBertrand M & Mullainathan S. (2000): Do CEO’s Set Their Own Pay? The Ones Without Principals Do: Massachusetts; Cambridge
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