Agency Theory Revisited: CEO Returns and Shareholder Interest Alignment

Abstract

Agency theory suggests that there may be managerial mischief when the interests of owners and managers (agents) diverge; one possible solution to this agency problem is the alignment of owner and agent interests through agent compensation and equity ownership. We develop the theoretical concept of CEO returns, and empirically estimate the magnitude of financial alignment, as measured by the relationship between CEO returns and shareholder returns. Our results, based on this new conceptualization and corresponding measurement, suggest stronger alignment than reported in previous work. We find that the magnitude of this alignment relationship plays a positive role in predicting subsequent firm performance; however, it does so in ways not clearly articulated or tested in prior CEO compensation research.

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