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Minding the gap: the effect of CEO underpayment on firm-specific knowledge
Journal of Knowledge Management
Article publication date: 16 August 2020
Issue publication date: 17 November 2020
Abstract
Purpose
This study aims to build on equity theory to assess the effect of chief executive officer (CEO) underpayment on the accumulation of firm-specific knowledge, accounting for the moderating effects of the CEO compensation gap and the clarity of the board’s informal hierarchy.
Design/methodology/approach
This study starts with all firms listed in the Execucomp database for the period 1992 to 2006. Then, all data sources are merged and entries with missing information are excluded. The final data set used for model estimations includes 1,152 firm-year observations. The command xtreg in Stata 12 with the fixed-effect option (fe) is used to estimate the relationship between CEO underpayment and firm-specific knowledge.
Findings
This study proposed and examined the role of CEO underpayment in discouraging CEO willingness to invest firm-specific human capital and, accordingly, to adopt a strategy of accumulating lower levels of firm-specific knowledge assets. The empirical analyses strongly support this argument. Moreover, CEO compensation gaps and the informal hierarchy of boards negatively moderated this relationship. That is, CEO underpayment had a weaker negative effect on firm-specific knowledge when the CEO compensation gap and the clarity of the board’s informal hierarchy were high.
Originality/value
Prior studies from the knowledge-based perspective have focused on the importance of firm-specific knowledge in enabling a firm to achieve superior financial performance. However, relatively little attention has been paid to CEOs’ willingness to accumulate firm-specific knowledge. The present study contributes to the knowledge-based view of the firm. This study integrates equity theory with the knowledge-based view of the firm by highlighting how unfair compensation of CEOs may discourage them to fully realize a firm’s potential to generate specific knowledge. By incorporating the fairness issue of CEO compensation into the knowledge-based view, this study contributes to a deeper understanding of the origins of firm-specific knowledge.
Keywords
Acknowledgements
The authors would like to thank National Natural Science Foundation of China for financial support (Grant No. 71972144; 71602140), the Fundamental Research Funds for the Central Universities (Grant No. 63202033) and Ministry of Education in China Project of Humanities and Social Sciences (Grant number: 18JJD630003).
Citation
Wang, L.,Chu, Z.,Jiang, W. andXu, Y. (2020), "Minding the gap: the effect of CEO underpayment on firm-specific knowledge",Journal of Knowledge Management, Vol. 24 No. 9, pp. 2107-2125.https://doi.org/10.1108/JKM-12-2019-0693
Publisher
:Emerald Publishing Limited
Copyright© 2020, Emerald Publishing Limited