What Death can Tell: Are Executives Paid for Their Contributions to Firm Value?

Abstract

Using stock price reactions to sudden deaths of executives as a measure of expected contribution to shareholder value, we provide empirical evidence on the relationship between executive pay and managerial contribution to shareholder value. We find, first, that the managerial labor market is characterized by positive sorting: managers with high contributions to shareholder value obtain higher pay. We estimate, second, that an average executive appears to retain 70% to 80% of the marginal rent from the firm-manager relationship. Overall, our study provides an estimate of rent sharing that is informative for the ongoing discussion about the level of executive compensation.