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Title: CEO-Firm Match and Principal-Agent Problem

Author(s): Fei Li and Masako Ueda

Publication Date: July 2005

Keyword(s): Principal-Agent problem and sorting

Programme Area(s): Financial Economics

Abstract: We study the implication of the standard principal-agent theory developed by Holmstrom and Milgrom (1987) on the endogenous matching of CEO and firm. We show that a CEO with low disutility of effort, low risk aversion, or both should manage a safer firm in the matching equilibrium, and that a CEO in a safer firm should receive a higher compensation than average. Nevertheless, these predictions are not supported by data; proxies for low disutility such as educational achievement and experience are either not related to firm risks or significantly related but in the direction opposite to that predicted by the theory. CEOs of safer firms are paid less than average, again contrary to the standard principal-agent theory.

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Bibliographic Reference

Li, F and Ueda, M. 2005. 'CEO-Firm Match and Principal-Agent Problem'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=5119