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Business and Management

Running Head: BUSINESS AND MANAGEMENT 1
Business and Management
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(Summary and Critical Analysis of articles)
Lin, Dan; Hsien-Chang Kuo; Lie-Huey Wang, “Chief Executive Compensation: An
empirical study of fat cat”, International Journal of Business & Finance Research 2013,
Vol. 7 Issue 2, p27-42. 16p.
Summary
Chief Executive Compensation: An Empirical Study of Fat Cat CEOs by Lin Dan et
al. is a research report on the “fat cat problem.” Most of the financial firms (especially those
hit buy the financial slump of 2007.2008) suffer financial crisis because of their
compensation plans for their CEO and other top executives. Most of these firms peg
performance to the compensations they offer the said people. As a result, the handsome
compensations put the CEOs and the top executives under pressure to deliver for the
company and the stakeholders of the firms. The CEOs therefore engage in excessive risk-
taking with short-term gambles that are always volatile as opposed to the long-term
objectives. This is creating the “fat cat problem” where the executive compensations continue
to soar as their performances slump. Despite the disturbing increase in the CEOs
compensation by the America financial firms, the compensations are never uniform amongst
the firms. The reports posits that it is hell-bent the market factors (managerial labour market,
firm size and current performance, human capital etc.) and power and preferences of the CEO
and the board. The reports discusses the “fat cat problem” in two folds. The “fat cat CEOs”
are those that perform dismally when compared to the weight of the compensations they
receive. On the other hand, the “fat cat companies” are the companies that perform dismally
but give their CEOs and top executives high compensations. This is indicative of a lacking
link between pay and performance in that companies are not paying based on performance.
Critical Analysis
According to the hypotheses of the report, both the age and tenure of the CEOs
positively impacts on the compensations they receive. In addition, the shareholding CEOs are
said to liken lower compensations because they values the general growth of the company
that will essentially the value of the shares shoot. The hypotheses suggest a negative
relationship between the CEO’s compensation and the CEO’s shareholding. An additional
hypothesis posits that an increase on the board size positively affects the compensations of
the CEO. These are effectively represented by the model specification method. Empirical
analysis of the results of the method with the fat cat companies indicate that the latter is still
increasing at an increasing rate. It is important that the conclusion of the paper borrow
directly from the findings and analysis. It is in tandem with the hypotheses proposed above it.
The conclusion rightfully calls for public review of the pay-performance link to set effective
standards that do no cause financial problems like happened in the 2007/2008 financial
depression.
Vijay Jog and Shantanu Dutta, “Searching for the Governance Grail”, Canadian
Investment Review, Spring 2004, pp.33-43.
Summary
“Just like Chief Executive Compensation: An Empirical Study of Fat Cat CEOs” by
Lin Dan et al., ““Searching for the Governance Grail” by Vijay Jog and Shantanu Dutta looks
studies the existing link between firms’ performance or the CEO compensations and the
effectiveness of the corporate governance. There paper by Vijay Jog and Shantanu Dutta
alludes to the widely held notion that good performance is always the result of good
governance, and that effectively management firms properly compensate their CEOs. The
two authors collected and presented results that suggest otherwise. The results prove that the
notion is wrong and misleading in that the relationship between good governance and
corporate performance as well as the CEO compensation is not always intuitive. Because
governance is broad to the extent of lacking a proper definition, any existing relationship
between the three must always be in the wrong direction.
Critical Analysis
The paper hypothesizes three things. There lacks the definitive relationship between
the CEO compensation and the performance of the firm hence triggering a possible review if
any. The governance mechanism variables are interdependent. Performance, ownership and
government structures are related, but they independently affect the compensation of the
CEO. It means therefore that governance and performance need not to be related to affect the
compensation that the corporate CEOs receive. If they do as some researchers posit then they
will always affect it in the opposite direction. To this, the conclusion of the paper is a
reflection of the research findings. However, the hypothesis falls short from the real
conclusion of the piece. The third hypothesis should have stated that the three elements are
actually not related even though they can independently affect the compensation.
Akhibe, Aigbe; Madura, Jeff. “Impact of anti-takeover amendments on corporate
performance”, Applied Financial Economics. Dec96, Vol. 6 Issue 6, p519-529. 11p.
Summary
Impact of anti-takeover amendments on corporate performance,” by Aigbe Akhibe
and Jeff Madura is informed by the observed immediate share price changes of companies
upon the announcement of takeovers. As a result, the paper hypothesized that the general
corporate performances are always adversely affected by antitakeover amendments. Just like
the takeover of corporates that essentially leads to change in stakeholders, antitakeover
amendments to affects the corporate performances. Change in corporate controls can
sometimes be good or bad depending on the execution of the entire process. In most case, it is
accompanied by immediate adverse results prompting the need for shark repulsion.
Sometimes, it creates a conducive bargaining environment for the stakeholders with the
interested acquirers setting pace for even a higher better bargain. The negative side is that it
can easily make firms to undergo hostile acquisition. It is introduces complacency within the
management team calling for improve performance monitory. The performance monitoring
of the running of the company introduces additional agency cost hence cutting the profits that
the firm makes. The paper clarifies that the antitakeover amendments affects the corporate
performances in various ways both positively and adversely.
Critical Analysis
According to the hypothesis of the paper, antitakeover amendments always create
adverse effects to the corporate performance. Aigbe Akhibe and Jeff Madura conducted
extensive research with many companies to find out the effect they experienced with the
adoption of the amendments. The reserved payed keen interest on the immediate effect on the
share prices of these companies. It is realised that it triggers poor spending decisions that
potentially adversely influences the shareholder wealth. The findings and the valuations of
the findings indicate that companies that fail to adopt the amendments are always prone to
taking risk shift decisions. These are decisions that show that the stakeholders are ready to let
the company with another management and therefore prevents them from making long-term
decisions. The paper contradicts the hypothesis by concluding that that firms that adopts the
antitakeover amendments always realise growth because they often concentrate on
implementing long-term goals. Even if they are interested in the takeover, the management
always make decisions that would ensure the growth of the entity to guarantee them a higher
takeover bid or bargain.

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