Adoption of performance-vested equity incentives under investor pressure: window dressing or taking the window of opportunity?

Abstract

Companies are increasingly adopting performance-vested equity compensation plans while the performance consequences are not clear. In this paper, we investigate whether firms are window dressing or taking the window of opportunity to adopt these plans when institutional investor pressure is present. We find that firms being targeted by shareholder proposals have higher cumulative abnormal returns during 3 days around the proposal filing date. Subsequent examinations suggest that target firms are more likely to adopt performance-vested stock or stock options within 2 years after being targeted. And the long-term stock return and operating performance of the target firms are significantly higher than control firms. However, additional analysis indicates that target firms are more likely to meet and beat financial analysts’ earnings estimates, and that such phenomenon may be motivated by earnings management. Collectively, our evidence is consistent with both the hypothesis of window dressing and the hypothesis of taking the window of opportunity.