Managerial Power and CEO Compensation in Financially Distressed Firms

We study the dynamics of managerial influence and Chief Executive Officers' (CEOs) compensation over the course of financial distress during 1992 to 2012. Using a matching estimator to identify suitable controls, we find that under distress firms reduce managerial board appointments, intensify board monitoring, and increase CEO turnover. They also pay considerably less to their CEOs, even to new CEOs from outside the firms. Against the backdrop of secular improvements in corporate governance, the effects on managerial influence and CEO compensation become smaller and larger, respectively, after 2002. Distressed firms cut CEO compensation and escalate board monitoring before reducing managerial board appointments. Financial distress does not seem to materially affect CEO compensation unrelated to firm performance, even among the firms that have high managerial influence before distress and substantially curtail the influence thereafter. A panel vector autoregression and impulse-response analysis shows prominent lead-lag relations between CEO compensation and managerial influence, suggesting that the CEO compensation changes are not necessarily due to the board structure changes