“Can managerial superiority explain high executive pay in large firms? Evidence ” by Peter L. SWAN
Peter L. SWAN
University of New South Wales
The University of Sydney
We present the first empirical evidence in support of Rosen’s (1982) ‘cloning’ hypothesis, explaining the firm size-executive pay effect in terms of a predicted greater superiority of managerial talent the larger is the firm. We show that executives from better performing firms are more likely to join larger firms. Moreover, a misspecification arises if actual firm size is used in pay-performance sensitivity estimation. A significantly smaller size effect on pay results after correcting for specification bias. Remarkably, the prior performance of the firm that previously employed the executive is a more significant determinant of the executive’s pay with the current employer than is current firm performance during the tenure of the executive in her new company.