Beyond Insider-Outsider Dichotomy: The Social Capital-Based Outsider-Insider Continuum, Executive Compensation and Strategic Risk-Taking

We propose a conceptual framework "Social Capital-Based Outsider-Insider Continuum" that delineates the spectrum between CEOs perceived as outsiders versus insiders within an organization, considering their levels of social capital. Using System GMM to test our hypotheses, we document that CEO social capital strengthens (weakens) the relationship between compensation as salary, shares, estimated and total options and strategic risk for well-connected long-tenured insiders (outsiders). Further, our findings indicate that for well-connected insiders (outsiders), the relationship between compensation as estimated and total options (bonus, shares, and intrinsic options) and strategic risk is weaker. Further tests using staggered DID reveal a decline in the relationship between compensation and strategic risk in firms transitioning from well-connected long-tenured insider CEOs to outsider CEOs. The findings highlight the significance of social capital in shaping the association between CEO compensation and strategic risk-taking, revealing nuanced differences between externally and internally appointed CEOs. By elucidating how CEOs are positioned along this continuum, we offer valuable insights for practitioners and policymakers seeking to enhance corporate governance practices and strategic decision-making processes.