Corporate Restructuring Quality and CEO Compensation

Abstract

We examine the effect of restructuring quality on chief executive officer (CEO) compensation. Extending prior research, we examine not only cash compensation, but also other components of the compensation package, as well as the mix of compensation. Incorporating both cash and non-cash compensation in our analysis provides a more complete analysis, as it allows us to examine if decreases in one form of compensation are offset by increases elsewhere in the compensation package. Indeed we find this exact result. That is, while our primary results suggest that total CEO compensation is unaffected by the restructuring, we find, especially for lower quality restructurings, that there is a decrease in bonus compensation offset by an increase in equity compensation. Sensitivity analysis shows that our results are robust to alternate variable definitions and model specifications. In particular, we find that our results are similar whether we use an ex-ante measure of restructuring quality, i.e., cumulative abnormal returns measured at first public disclosure of restructuring, or an ex-post measure of restructuring quality, i.e., unexpected cash flow from operations three years after the restructuring.