CEO Equity Research Articles

The Impact of Earnings Management on CEO Equity Incentives

This paper investigates whether firms adjust CEO equity incentives in response to prior earnings management. I show that the risk-taking incentives from new equity grants are lower for firms with higher prior real earnings management (REM), but not for firms with higher prior accruals-based earnings management (AEM). These adjustments are associated with sustained earnings management over the three years before the grant, but not with transitory earnings management. Additionally, I show that firms with higher institutional ownership primarily drive the negative relationship between REM and AEM and risk-taking incentives from new equity grants. My results are consistent with firms altering compensation incentives to restrain managers’ value-reducing behavior, in part, due to the monitoring of institutional investors.

Lesson from stock price crash: Changes in managerial confidence and incentives

This paper investigates the consequences of stock price crashes. I find that stock price crash risk subsequently reduces managerial confidence levels, as proxied by the CEO's option-based and earnings call transcript's text-based measures. I also find that stock price crash risk reduces CEO compensation and equity incentives, suggesting that a firm seeks to adjust managerial incentives after its stock price crashes to prevent future occurrences. Furthermore, CEOs with high confidence are more likely to curtail overinvestment after their crash experiences relative to others, thereby contributing to shareholder value. Overall, this paper provides novel evidence that CEOs and firms appear to learn from their experiences of stock price crashes, suggesting that stock price crashes may induce experience-driven conservatism that influences CEO and corporate decisions.

Diverging Paths: CEO Regulatory Focus, Corporate Social Responsibility, and the Enigma of Firm Performance

Regulatory focus theory theorizes that there are two distinct dispositional foci of self-regulation (promotion focus and prevention focus) that impact individuals’ motivational tendencies to achieve their decision-making processes. This study integrates regulatory focus theory with upper echelons theory to investigate how CEO regulatory focus (i.e., higher degrees of promotion focus relative to prevention focus) influences corporate strategic outcomes, particularly regarding the pursuit of corporate social responsibility (CSR) performance and firm performance. This study uses data collected from the annual reports of S&P 1500 firms in the US from 2000 to 2018. Results show a negative association between CEOs who are predominantly promotion-focused and CSR performance. This negative association is diminished in firms with better corporate governance (i.e., higher CEO equity compensation and greater institutional ownership). The results also show that CSR plays a mediating role in the relationship between CEO regulatory focus and firm performance. These findings not only contribute to the existing literature by highlighting the role of CEO regulatory focus in shaping CSR initiatives but also shed light on its implications for firm performance.

Disturbing the Quiet Life? Competition and CEO Incentives

ABSTRACT Although it is well understood that product market competition acts as a disciplining mechanism that reduces inefficiencies, our understanding of the implications for firms’ incentive design choices is still limited. We use a comprehensive new measure of competition and examine its effect on four major choices: CEO equity portfolio incentives, annual bonus plan incentives, choice of performance measures, and difficulty of financial performance targets. We find that competition reduces firm profits and total CEO compensation, including equity grants, which then also weakens portfolio incentives. Firms respond by adjusting annual bonus plans to restore incentives. Specifically, we find that competition goes together with stronger bonus plan incentives, more challenging annual performance targets, and a greater emphasis on long-term performance measures. Finally, we show that competition increases performance relative to annual bonus targets, which we interpret as evidence that CEOs work harder but get paid less in highly competitive environments. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: M41; M52.

The effect of CEO's compensation in driving corporate ESG greenwashing: Evidence from China.

This study examines the relationship between CEO compensation schemes and ESG greenwashing behavior in Chinese listed firms during the period 2013-2022. We find that a CEO's cash (equity) compensation has a significantly positive (negative) correlation with corporate ESG greenwashing behavior. From mechanism analysis, consistent with the agency problem view, firms engage in more severe ESG greenwashing behavior under a higher proportion of cash in the CEO compensation structure. Such distortion behavior is mitigated by higher internal control quality in firms having an equity incentive for their CEO under the convergence of interest viewpoint. Additional analysis reveals that corporates audited by large accounting firms and those with more media coverage exacerbate the positive correlation between CEO cash compensation and ESG greenwashing behavior, while government environmental regulations reinforce the inhibitory effect of CEO equity compensation on ESG greenwashing. Our results imply that different CEO compensation schemes can have opposite effects on limiting firms' ESG greenwashing behavior in the Chinese context. Furthermore, we highlight that the question of form over substance principle to certain external governance mechanisms, leading CEO to exacerbate impression management of ESG disclosure.

Firm-level litigation risk and CEO equity incentives

Firm-level litigation risk and CEO equity incentives

CEO equity incentive duration and expected crash risk

This study examines the effect of CEO equity incentive duration on firm-specific ex ante crash risk. Using a measure that explicitly accounts for the length of stock and option grant vesting terms (Gopalan et al., 2014), we find that longer CEO equity incentive duration reduces investors' perceived crash risk, gauged by the steepness of option implied volatility smirk. This finding holds for alternative measures of duration that account for endogeneity, alternative regression specification with lagged independent variables and using an instrumental variable approach. We further find that this negative relation is more salient for firms whose CEOs have a higher level of career concerns and for firms with weaker external monitoring. Additional tests point to financial reporting obfuscation and over-investment as two possible channels through which the duration–crash risk relation operates. Overall, our results suggest that lengthening CEO equity incentive duration discourages managers from bad news hoarding and continuing negative NPV projects, which reduces a firm's expected crash risk.

The Perspective of Long-Term and Short-Term Incentives on the Business Environment, Executive Incentive Contracts, and Enterprise Innovation

Innovation is the first driving force leading economic development, and small and medium-sized enterprises have strategic significance in stimulating innovation activity and promoting economic growth. Few studies concentrating on small and medium-sized businesses examine the connection between executive incentive contracts and business innovation. Therefore, we use them as the research object in this study. We empirically analyze the relationship between executive incentive contracts and enterprise innovation using the research sample of small and medium-sized board-listed companies from 2009 to 2020, focusing on long-term equity and short-term pay incentives. The study also analyzes if the corporate environment will impact a specific motivational system. The results show that improving executive shareholding and pay level can significantly promote enterprise innovation. The areas with better business environments mean practical innovation. Otherwise, organizational equity and pay incentives positively affect innovation in non-state-owned enterprises. This effect might increase the business environment compared to state-owned enterprises. Meanwhile, information transparency is improved by equity incentives and pay incentives, and the implementation intensity of equity incentives reduces the degree of financialization. By demonstrating how CEO equity and pay incentives affect corporate innovation, this study adds to the body of literature in that field. It also offers empirical evidence to assist corporations in creating the most corporate equality and pay incentives. Future studies should continue examining the impact of non-material incentives on enterprise innovation and the relationship between equity and pay incentives.

Shareholder activism in listed family firms: Exploring the effectiveness of say‐on‐pay on CEO compensation

AbstractThe widespread critical evidence surrounding executive compensation of listed corporations has boosted shareholder activism in recent decades. The say‐on‐pay (SOP) mechanism—a vote in which shareholders express their (dis)agreement with executive pay designs—is one of the corporate governance mechanisms that has led to this activism among listed firms. Merging agency and socioemotional wealth (SEW) arguments, this paper analyzes how effective SOP voting results are among listed family firms in terms of CEO compensation efficiency and equity. Using a sample of UK listed firms from 2011 to 2018, our results show that SOP effectiveness is positively influenced by family ownership and is strongly moderated by family involvement in management and in governance as well as by family generation. Our findings stress the strong family effect and the ethical perceptions of family shareholders on SOP voting, showing how family participation in the firm encourages fairer and more aligned CEO compensation packages. SOP institutional and practical implications oriented to preserve shareholder value and family wealth are finally outlined.

The Effect of Target CEO Equity Risk Bearing on Acquisition Premium Decisions

The Effect of Target CEO Equity Risk Bearing on Acquisition Premium Decisions

Director optimism and CEO equity compensation

Director optimism and CEO equity compensation

The generalist CEO pay premium and CEO risk aversion

AbstractWe investigate whether and how managerial risk aversion influences the structuring of the generalist pay premium. We use three candidate variables for managerial risk aversion: the CEO's equity portfolio vega, decision horizon, and wealth. We find that equity‐based pay differs between generalist CEOs (who have broader experience spanning several industries) and non‐generalist CEOs (who tend to have narrower, specialized industry‐specific experience) based on their risk appetite. Further, how the generalist pay premium is structured depends on the risk aversion measure. Because generalist CEOs tend to be better paid than their counterparts, understanding their risk aversion level will help companies improve the structure of these CEOs’ compensation packages, and ultimately those of all CEOs. When vega is the risk aversion measure, CEOs get compensated for bearing risk. However, generalist CEOs with high vegas suffer a “risk discount” in their compensation. These generalist CEOs are associated with lower cash, equity, and total pay. CEOs with longer decision horizons get more equity and less cash, but this structuring does not extend to the generalist CEOs. Finally, wealthier CEOs get more cash and total pay. However, generalist CEOs who are wealthier get less cash pay.

Predicting primary and secondary stakeholder engagement: A CEO motivation-means contingency model

Our research predicts different stakeholder engagement emphases through a CEO motivation-means contingency model. Drawing upon regulatory focus and power theories, we argue that higher levels of CEO prevention focus and informal power (firm experience, knowledge, and board connections) are associated with stronger primary stakeholder engagement, whereas higher levels of CEO promotion focus and formal power (CEO duality and equity ownership) are associated with stronger secondary stakeholder engagement. By analyzing a panel dataset of S&P 500 firms, we found support for our hypotheses. These findings accentuate our contributions by emphasizing the importance of considering both CEO motivation (regulatory focus) and means (power) to understand how CEOs’ characteristics influence their firms’ stakeholder engagement. Our study extends recent work in the strategy and upper echelons literatures by showing that executives’ regulatory focus does not operate in a vacuum; rather, its effects on managerial decision-making and firm strategies are context-specific.

The dynamics of CEO equity vs. inside debt and firm performance

This paper provides new evidence on the comparative dynamic effects of CEO inside debt and equity compensation on firm performance as measured by Tobin’s Q. In contrast to the extant literature, we find significant empirical evidence supporting the classic Jensen and Meckling (1976) premise that managers should receive debt vs. equity compensation in proportion to the capital structure of the firm. We also provide new evidence showing that the effects of the CEO compensation structure on firm performance are dependent on the CEO’s time horizon, as measured by the expected period of employment to retirement. We show that the incremental benefits of equity compensation to performance increase with the CEO’s projected time to retirement. A similar, but insignificant relationship is observed for CEO inside debt compensation. Cash compensation is more beneficial to the firm when concentrated near the end of the CEO’s tenure.

Do CEOs influence CFOs’ equity incentives to manage earnings?

This study examines whether CEOs’ incremental equity incentives relative to CFOs (i.e., the gap between CEO equity incentives and CFO equity incentives) and CEO power constrain or exacerbate CFOs' equity incentives to manage earnings. In most companies, CEOs own more equity than CFOs and may pressure CFOs to engage in earnings management. I find no evidence that CEO incremental equity incentives or CEO power affect the association between CFOs’ equity incentives and earnings management. In addition, I find that CFOs’ equity incentives mitigate real earnings management activities, which can help align the interests of CFOs with shareholders.

The mechanism of media pressure on corporate green technology innovation: the moderating effect of corporate internal governance

ABSTRACT This paper has exaimed the causal effect between media pressure and corporate green innovation through the micro-perspective of internal governance. We find that media pressure is supposed to effectively improve the enterprise green technology innovation, ownership concentration, independent directors and salary incentives have a significant positive U-shaped regulatory effect on the relationship between media pressure and enterprise green technology innovation. CEO duality and equity incentives are significantly moderating the relationship between media pressure and corporate green technology innovation. As for property heterogeneity, media pressure effectively improves the enterprises green innovation performance of state-owned enterprises (SOEs) and non-state-owned enterprises (Non-SOEs). Specifically, the moderating effect of internal governance elements is consistent with the baseline results in the Non-SOEs sample, while ownership concentration inverted U-shape regulates this process and other internal governance elements are consistent with the baseline results and in the SOEs sample.

Firm‐Level Climate Change Risk and CEO Equity Incentives

AbstractWe document evidence that CEOs who lead firms that face higher climate change risk (CCR) receive higher equity‐based compensation. Our finding is consistent with the compensating wedge differential theory and survives numerous robustness and endogeneity tests. The result is more prominent for firms that are socially responsible, susceptible to higher environmental litigation and part of the non‐high‐tech industries. Furthermore, we find supportive evidence that firms offering higher equity incentives to their CEOs for managing higher CCR are usually better off in the long run via a lower cost of equity capital and higher firm valuation.

Oil price uncertainty and stock price informativeness: Evidence from listed U.S. companies

This paper examines the relationship between oil price uncertainty and stock price information for managerial decision making. Under the investment-q sensitivity framework, we use the data of listed U.S. companies from 2008 to 2020 and find that oil price uncertainty has a positive impact on investment-q sensitivity that is mainly driven by the crowding of informed traders and the promotion of managerial learning. The interrelation between oil price uncertainty and investment-q sensitivity is more remarkable for firms with uncorrelated product demand with that of their peers, stronger CEO concern, and greater CEO equity incentives. Furthermore, we provide evidence that oil price uncertainty can enhance investment-q sensitivity, especially for firms in highly oil-intensive industries and non-oil-producing states. Overall, our research illustrates how oil price uncertainty affects stock price informativeness for firms' decision making.

Tax Avoidance and Corporate Investments

This study examines the association between firms’ tax avoidance and long-term investments. We find that tax avoidance firms make greater investment than nontax avoidance firms, and that the positive association between tax avoidance and investments holds both for firms that are financially constrained, and therefore ex-ante likely to underinvest, and for financially unconstrained firms that are ex-ante more likely to overinvest. Our results further show that CEO equity incentives and governance strength exert an incremental effect on investment decisions of tax avoidance firms. In additional analyses, we demonstrate that tax avoidance firms’ investments are associated with improved future firm performance especially when those firms are ex-ante more likely to underinvest. For tax avoidance firms that are ex-ante more likely to overinvest, current investments are associated with declined future firm performance. Tax avoidance firms have higher (lower) investment efficiency in terms of improved (declined) operating profitability in the post-investment period when they have lower (higher) CEO equity incentives and stronger (weaker) governance. Overall, our results shed light on efficiency in utilizing the available cash through tax avoidance in long-term investments that might create shareholder value for a group of financially constrained firms but diminish shareholder value for another group of financially unconstrained firms.

The role of financial performance of Eurostoxx listed hotel companies in determining CEO compensation

This paper is focused on the effect of firms’ financial performance in the compensation of CEOs of Eurostoxx listed hotel firms. We analyze CEO cash-, equity-, and total-compensation using as proxies of financial performance both accounting-based and market-based measures, where both return and risk are considered. Market-based financial risk measure enables us to delve into the relationship between CEO compensation policies and lagged firms' systematic and idiosyncratic risk components computed by using a well-known asset-pricing factorial model. Results show a non-significant linear relationship between CEO compensation policies and stock return in the Eurostoxx hotel firms even when we control for market-based risk. However, results support a negative and significant relationship between lagged financial risk and CEO equity compensation that is more intensively related with the firms' idiosyncratic risk component. Moreover, we show evidence of a non-linear effect of financial return on CEO cash compensation that is idiosyncratic-risk-level dependent.