CEO Compensation and Stock Splits

Abstract

Do managers perform stock splits to derive personal benefits from them? Given that the authority to carry out a stock split lies largely with the CEO, we wonder what the CEO's personal incentives are to undertake a stock split. We show that the more convex the compensation structure of a CEO, the larger is the likelihood of a stock split. As it is well-documented that stock splits lead to an increase in return volatility, we argue that the likely reason for our finding is that CEOs attempt to increase the value of their option-based compensation component via the stock split. Using data on CEOs' mandatory filings of stock option exercises, we provide further evidence of this strategic behavior by documenting that stock splits predict the exercise of stock options by CEOs.