The media and CEO dominance

• Published date: 01 March 2022
• Author: Jiexiang Huang,Helen Roberts,Eric K. M. Tan
• Date: 01 March 2022
• DOI: http://doi.org/10.1111/irfi.12338

ORIGINAL ARTICLE

The media and CEO dominance

Jiexiang Huang

1

| Helen Roberts

1

| Eric K. M. Tan

2

1

Department of Accountancy and Finance,

University of Otago, Dunedin, New Zealand

2

UQ Business School, University of

Queensland, St Lucia, Queensland, Australia

Correspondence

Helen Roberts, Department of Accountancy

and Finance, University of Otago, PO Box

56, Dunedin 9054, New Zealand.

Email: helen.roberts@otago.ac.nz

Abstract

This study investigates the relation between the media and

CEO dominance. Using CEO pay slice (CPS) as a measure of

CEO dominance, we find that negative CEO media expo-

sure, measured by the interaction effects of negative media

tone and media coverage given to the CEO of a firm, is

associated with a reduction in CEO dominance. Consistent

with theoretical predictions, we find that this effect is

driven by the response of the Top4 executives to the exter-

nal challenges posed by the media and is more pronounced

in firms with good internal governance. The findings indi-

cate that the media plays an important role as an external

monitor, moderating manager behavior through the dissem-

ination of news.

KEYWORDS

CEO dominance, CEO pay slice, corporate governance, media

JEL CLASSIFICATION

G31; G32; G34

1|INTRODUCTION

Previous studies show that the media can detect corporate financial fraud and convey financial information to boards

of directors (Joe, Louis, & Robinson, 2009; Miller, 2006). Drawing primarily from financial perspectives, such as

agency theory, these studies imply that the media act as a type of governance control mechanism by collecting and

disseminating information about firms and their CEOs (Fang & Peress, 2009; Zingales, 2000). Dyck, Volchkova, and

We are indebted to an anonymous referee for improving the article. We also gratefully acknowledge the comments and suggestions provided by

conference participants at the 2018 Financial Markets and Corporate Governance Conference, and 2018 New Zealand Finance Meeting. We declare that

we have no relevant or material financial interests that relate to the research described in this article.

Received: 8 June 2020 Revised: 24 November 2020 Accepted: 3 December 2020

DOI: 10.1111/irfi.12338

© 2020 International Review of Finance Ltd. 2020

International Review of Finance. 2022;22:5–35. wileyonlinelibrary.com/journal/irfi 5

Zingales (2008) propose that the media influence managers' actions by influencing the value of CEOs' human capital.

Liu and McConnell (2013) investigate how the media influence managers' capital allocation decision. These findings

suggest that the media can play a role in corporate governance by influencing managers' behaviors. Our study

extends the research into the governance role of the media by investigating the relationship between the media and

CEO dominance.

A change in compensation policy may be difficult to detect when negative media attention imposes costs on

firms (Core, Guay, & Larcker, 2008). However, this does not mean that the media do not influence other CEO charac-

teristics indirectly related to CEO pay, such as CEO dominance. The media characterize the performance of CEOs

and, as a result, shape public perception about CEO ability (Liu, McConnell, & Xu, 2017). The media can influence the

reputational capital of CEOs by disseminating information about their actions. One possible effect is that negative

CEO media exposure damages the reputational capital of the board of directors, in particular the directors on the

compensation committee, who respond to the negative CEO media attention. In order to reduce the damage, the

directors on the compensation committee would adjust the CPS by setting the CEO and top executive pay packages

at similar levels. This study examines how CEO dominance, measured by the relative difference between the CEO

and the four highest-paid executives' pay levels, responds to negative media exposure given to the CEO.

Consistent with previous studies (Bebchuk, Cremers, & Peyer, 2006; Bebchuk, Cremers, & Peyer, 2011; Liu &

Jiraporn, 2010; Mande & Son, 2012), we consider a relative measure of CEO dominance: CEO pay slice (CPS). This

measure captures the importance of the CEO within the top executive team. Our study utilizes the CPS measure for

the following reasons. First, CPS reflects the relative centrality of the CEO in the top executive team in terms of abil-

ity, contribution to the firm, and power (Bebchuk et al., 2006). Second, CPS captures more CEO characteristics than

the formal status variables, such as president, chairman, or founder (Bebchuk et al., 2011; Jiraporn, Liu, & Kim, 2014;

Mande & Son, 2012). Thus, CPS is used to examine whether current media exposure is associated with CEOs' domi-

nance in the future.

In analyzing the effect of the media on CEO dominance, we also need to consider the impact of the media on

other top management teams (TMT) members who report to the CEO.

1

Hambrick (1995) reported the pay of top

managers besides the CEO is often weighted toward the performance of each executive's subunit. They highlight

that non-CEO executives do not necessarily support the CEO when there is an external challenge. This behavior is

consistent with higher levels of pay awarded to other top executives and a simultaneous decline in CEO dominance

when a firm experiences the external challenge as measured by negative CEO media exposure. Increasing other

executives' compensation reduces the difference in the executive pay gap thereby aligning the interests of top man-

agers and shareholders (Jensen & Murphy, 1990) and helps to address the agency problem. Thus, smaller pay differ-

ences between CEOs and their respective TMT are the result of the corporate governance mechanism used to align

executive and shareholder interests when confronting negative CEO media exposure. Specifically, the media serve

as an external monitor by conveying information that prompts a resolve to the agency problem. We conjecture that

the negative tone of CEO media coverage together with the media attention given to the CEO significantly decrease

the CPS of the firm. The effect is driven by the compensation of the Top4 non-CEO executives. This is supported by

our empirical results whereby we observe an increase in Top4 pay while CEO pay does not change following nega-

tive CEO media exposure.

While we conjecture that the media will have a direct effect on CEO dominance, we subsequently explore the

moderating effect of the firm's internal governance mechanisms. To examine the relation between the media and

CEO dominance in more detail, we consider how the board's internal governance is associated with the effective

influence of the media on CEO dominance. By examining firms with poor and good internal corporate governance,

we investigate whether there is a complementary relation between the internal and external governance mecha-

nisms as documented by Cremers and Nair (2005). Our results document new evidence for the complementary rela-

tion between internal and external governance mechanisms in moderating CEO dominance. This finding supports

the role of the media as an effective external governance mechanism, for firms with strong internal governance

(Graf-Vlachy, Oliver, Banfield, König, & Bundy, 2020; Vergne, Wernicke, & Brenner, 2018). We find that poorly

6HUANG ET AL.