Changes In Shareholder Wealth Research Articles

Pay for Performance? Government Regulation and the Structure of Compensation Contracts

In 1992-1993, the SEC required enhanced disclosure on executive compensation and Congress enacted tax legislation, i.e. Internal Revenue Code Section 162(m), limiting the deductibility of non-performance related compensation over one million dollars. We examine the effects of these regulatory changes and report small and large sample evidence that many million-dollar firms have reduced salaries in response to 162(m) and that salary growth rates have declined post-1993 for the firms most likely to be affected by the regulations. We further document that bonus and total compensation payouts are increasingly sensitive to stock returns after 1993, especially for firms with million-dollar pay packages. We also document that, once we control for factors affecting CEO incentives, the sensitivity of the CEO?s wealth to changes in shareholder wealth has increased from 1993 to 1996 for firms with CEOs approaching the million-dollar mark. Overall, our results suggest that some firms have altered the structure of CEO compensation in response to 162(m) by reducing salaries and that, on average, the pay for performance sensitivity has increased following the regulations, especially for million-dollar firms.

Planned Changes in Accounting Principles for UK Life Insurance Companies: A Preliminary Investigation of Stock Market Impact

The Association of British Insurers’ (ABI) proposals for an ‘accruals’ method would have the effect of ‘front‐loading’ profits reported on life assurance business compared with the traditional ‘statutory solvency’ basis. The ABI argued that adoption of the method would lead to a more realistic valuation of life company shares. This research tests this view by investigating, by means of an event study, the stock market impacts of the announcements of the proposals and the initial releases of ‘accruals’ profits, utilising a recently developed methodology for allowing for the effect of industry and event date clustering. The results found here do not provide any evidence to substantiate the ABI’s view, although they do indicate that, where companies signal a change in the allocation of results as between shareholders and policyholders, share prices do reflect the perceived change in shareholder wealth. Moreover, it is argued that the accruals method itself may be more appropriately seen as reflecting and enabling a more pervasive change in managerial approach, refocusing on adding value for shareholders rather than policyholders. Any improvement in share prices resulting from this development might therefore only be expected to be very gradual and hard to distinguish from the impact of other effects.

Bond Rating Changes and CEO Compensation

Jensen and Murphy (1990) and others have found a small but statistically significant relationship between firm performance (as measured by change in shareholder wealth or firm profits) and executive compensation. In this study we investigate the pay‐ performance relationship further by considering the relationship between an outside measure of firm performance (changes in the firm's bond rating) and the contemporaneous change in the compensation of the firm's CEO. We find that when a firm's bond rating is down‐graded, CEO total compensation declines by a relatively small amount ($165,500) and when a firm's bond rating is upgraded, CEO total compensation increases markedly ($3,202,900). Thus, while a positive pay‐performance relationship exists, the relationship is not symmetric. CEO compensation changes (increases) much more when firm performance improves than it changes (decreases) when firm performance declines. Further, most of the change in CEO compensation occurs in the stock gains (profits from the exercise of stock options) category for both firms experiencing bond rating upgrades and down‐grades.

The Stock Market Reaction to Plant Closings

This paper is an event time study of the valuation effects of a sample of eighty‐two permanent plant closings. The traditional approach to project termination decisions suggests that common stock prices should increase around the date on which firms publicly announce the termination of a project. However, the empirical results of this study indicate that, on average, no significant changes in share holder wealth are associated with the closing down of capital assets.

Uncertainty during tender offers and the measurement of shareholder wealth effects

Uncertainty concerning the ultimate outcome of tender offers may affect the measurement of changes in shareholder wealth. The uncertainty regarding the outcome of tender offers is measured by estimating the probability of acceptance of tender offers during the period when the tender offers are outstanding. The estimated probability of acceptance of tender offers implies that the amount of uncertainty prior to knowledge of the ultimate outcome is substantial and affects the measurement of expected equity gains. The uncertainty-adjusted measure of the change in shareholder wealth indicates that previous studies may have underestimated the gains expected to result from tender offers.

The Effects of the NLRA on Stockholder Wealth in the 1930s

Whereas most recent research examining the effects of the NLRA on labor-management relations has focused on the impact of specific provisions of the law, this study provides an estimate of the impact of the passage of the NLRA on 75 firms that were at great risk of being unionized in the 1930s. Taking changes in shareholder wealth as a measure of the shift in the balance of power caused by the NLRA, the authors find that the passage of the NLRA caused a statistically and economically significant decline in shareholder wealth for the sampled firms. Specifically, by April 1937, stockholder wealth in the firms was 15.9% lower than would have been expected had the NLRA not been enacted.

CEO INCENTIVES — IT'S NOT HOW MUCH YOU PAY, BUT HOW*

In this 1990 Harvard Business Review classic, the authors begin by correcting a number of widespread misconceptions: •Contrary to headlines at the time, top executives at the end of the 1980s were not receiving record salaries and bonuses. Instead they were catching up to real levels of pay that prevailed during the 1930s and had dropped sharply since then. •Annual changes in executive compensation during the 1970s and 1980s were largely unrelated to changes in corporate performance, with CEO total compensation varying by only about $3 with every $1,000 change in shareholder wealth. (And the variability of total CEO pay was no higher than that of the compensation of hourly and salaried employees.) •With respect to pay for performance, U.S. compensation practices in the '70s and '80s were getting worse rather than better over time. The percentage of stock ownership by CEOs in large public companies was ten times greater in the 1930s than in the 1980s. And during the previous 15 years (1975-1989), CEO holdings as a fraction of value had actually fallen. With the aim of reversing these trends, the authors offered three recommendations: •Substantial equity ownership by CEOs. •Structuring of cash compensation to provide big rewards for outstanding performance and meaningful penalties for poor performance. •Increased threat of dismissal for poor performance. Since publication of this article in 1990, the first and third of these goals have largely been accomplished (while the second has proved more elusive).

Performance Pay and Top-Management Incentives

Our estimates of the pay-performance relation (including pay, options, stockholdings, and dismissal) for chief executive officers indicate that CEO wealth changes $3.25 for every $1,000 change in shareholder wealth. Although the incentives generated by stock ownership are large relative to pay and dismissal incentives, most CEOs hold trivial fractions of their firm's stock, and ownership levels have declined over the past 50 years. We hypothesize that public and private political forces impose constraints that reduce the pay-performance sensitivity. Declines in both the pay-performance relation and the level of CEO pay since the 1930s are consistent with this hypothesis.

The Use of Excess Cash and Debt Capacity as a Motive for Merger

This study explores the hypothesis that capital structure change provides bidders and tar? gets a motive for merger. After a brief review of theories that would support the hypothe? sis, the paper reports results of tests on (1) leverage in bidder and target firms, and (2) change in shareholder wealth associated with change in leverage. The findings support the theory of Myers and Majluf that slack-rich bidders pair with slack-poor targets to create value. These results are contrary to other studies, which find highly levered bid? ders.

Merger proposals, managerial discretion, and magnitude of shareholders' wealth gains

Recently, the market for corporate control has attracted much attention. Scholars have attempted to ascertain whether managerial resistance is in the interests of shareholders. This study compares the average actual changes in wealth of accepted merger proposals with those of rejected merger proposals. It also compares the realized changes in shareholder wealth of the rejected proposals with the realizable shareholder wealth changes. In either case, managerial resistance leads to smaller gains in wealth. Based on these results, we cannot reject the view that managerial resistance is detrimental to the interests of shareholders.