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Abstract: Controlling shareholders who are normally also the executive directors tend to set their own levels of remuneration as a means of expropriating minority shareholders. This study tests the relationship between ownership concentration and executive remuneration, using panel data for a sample of 191 Malaysian public listed companies over the 2002-2007 period. This study finds a non linear relationship between share ownership of executive directors and their levels of salary by using the fixed-effects (FE) model. The model exhibits a negative, positive and negative relationship which corresponds to the occurrence of convergence-of-interests, managerial entrenchment, and convergence-of-interests effects. The positive relationship between 23 to 76 per cent between executive ownership and salary for levels of executive ownership indicates the existence of expropriation. Despite the occurrence of expropriation, salary and remuneration received by executive directors are positively related to market-to-book ratio. A positive association is also found between bonus paid to executive directors and firm's accounting profits. Independent non executive directors and the remuneration committee are able to exert a downward effect on directors' remuneration and bonus. But external blockholders do not possess such an influence in reining in the salary, bonus, or remuneration of executive directors.
Keywords: Agency theory, corporate governance, executive compensation JEL classification: D23, G34, J33
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1. Introduction
The agency problem arises from conflicts of interest between principal and agent as each party has different goals. In the case of publicly-owned firms, the separation of ownership and control may induce potential conflicts between the interests of managers (agent) and shareholders (principal). Shareholders are interested in maximising the value of the firm, but managers' objectives may also include enhancing personal wealth, job security, and prestige. Elston and Goldberg (2003) argued that the most direct benefit managers could obtain is increased monetary compensation, and this benefit is also the easiest one to measure as compared to non monetary benefits. They regarded the emergence of executive compensation as a prominent form of agency cost to dispersed ownership. Goldberg and Idson (1995) also shared the same opinion that agency problem may manifest itself in the compensation of top executives of corporations where management and ownership are separate. The conflicts of interests between shareholders and managers are further perpetuated by the existence...