Equity Grants 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.

COVID-19-Motivated Changes to Executive Compensation

ABSTRACT We provide new insights into companies’ decisions to cut CEO pay during the COVID-19 pandemic by comparing 482 firms announcing CEO salary cuts with those that do not. We find that salary cuts are more prevalent in firms with poor pre-pandemic performance, lower cash holdings, employee layoffs, and better governance. Shareholders appear to view these cuts favorably in firms with higher CEO pay ratios and those that are the first among their peer firms to make such an announcement. These findings suggest that pay cuts reflect efforts to adjust pay efficiently in response to changes in contracting environments and to lend legitimacy to other difficult decisions that firms face, alongside governance characteristics. We also find that CEO salary cuts coincide with well-timed equity grants that appreciate in value more than those in noncutting firms and with a shift away from earnings-based metrics in performance-based incentive plans. Data Availability: Data are available from the public sources cited in the text. JEL Classifications: G34; M12; M21; M52.

Whose firm? Resilience of the German corporate sector to financialization

Abstract We examine how financialization has progressed in the German nonfinancial corporate sector since the 2000s. Using a sample of firms historically listed in the largest German stock market indices, DAX and MDAX, we not only confirm the rise of international passive asset managers but also find a growing prevalence of controlling business families. Although executive pay increasingly consists of equity grants, indicating growing shareholder value orientation, we do not identify corporate financialization in terms of rising share buybacks and payout rates. Instead, ever larger shares of corporate funds are kept inside firms as retained earnings. While firms in the USA ‘downsize-and-distribute’ under the pressure of institutional investors, we hold that German firms ‘save-and-sit-on-it’. Although shaped by the liberalization of corporate governance regulations, this regime still relies on blockholdings and codetermination, while integrating asset managers as new providers of patient capital.

Equity Incentive Plans and Board of Director Discretion over Equity Grants

Equity Incentive Plans and Board of Director Discretion over Equity Grants

Effectiveness of FPOs: Credit Performance Evaluation of Farmer Producer Companies in Tamil Nadu

Farmer producer organisations (FPOs) in India were introduced as farmer’s cooperative society with the prime objective of enhancing the profitability and productivity of small and marginal farmers by cooperative action. The most crucial element which determines the establishment and success of the farmer producer companies (FPCs) is financial support. Thus, the government is providing direct funding in the form of various grants such as start-up grants, equity grants, mezzanine capital assistance, seed/pulse processing unit and so on. Despite getting huge credit support from the government in the form of various incentives, many companies are struggling and failing to sustain themselves in the long run. The present study evaluated the credit performance of FPCs in Tamil Nadu based on four financial ratio indicators named growth ability, profitability, debt ability/solvency and indicators of per share. The study result indicates that most of the companies fall under the average to low average performance category which highlights the inefficiency in the financial management of study FPCs. Comparatively FPCs’ credit performance was found to be increasing. The results of the analysis shed light on the importance of credit management which is possible through capacity-building training and regular monitoring and guidance for the FPCs in credit handling.

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.

Managerial Labor Market Mobility and Corporate Social Responsibility

ABSTRACT The staggered rejection of the inevitable disclosure doctrine (IDD) by state courts increases the mobility of both managerial and rank-and-file employee labor markets. Flammer and Kacperczyk (2019) report a positive impact of the IDD rejection on firms’ corporate social responsibility (CSR) and interpret the finding as managers using CSR to retain employees. We propose and test managerial incentives to grow their external employment potential as another explanation. We find that the IDD rejection impact is stronger when industry firms are more likely to hire external CEOs and when external tournament prizes are greater, and weaker when CEOs are held up by unvested equity grants and when governance control is stronger. We fail to find that the IDD rejection effect varies with employee incentives. We further find that CSR investment does help CEOs obtain sought-after personal benefits by increasing their total pay and the likelihood of landing a new executive position. JEL Classifications: J44; J62; M14.

Influential independent directors' reputation incentives: Impacts on CEO compensation contracts and financial reporting

We study how reputation incentives of influential independent directors (those holding multiple directorships) affect CEO compensation and firm financial reporting decisions. We find that CEO equity-based incentives, measured by CEO delta, vega and the number of equity grants are positively related to these directors' reputation incentives. These director reputation incentives also mitigate the perverse CEO incentives to inflate earnings, which arise from such high-powered compensation structures, by motivating increased board monitoring to limit discretionary accruals and real activity-based earnings management. These findings are invariant to endogeneity adjustments under multiple approaches, including exogenous changes in reputation incentives.

Equity Grants Tracking and Reporting on Total Compensation in SAP SuccessFactors

Equity Grants Tracking and Reporting on Total Compensation in SAP SuccessFactors

Strategic repurchases and equity sales: Evidence from equity vesting schedules

This paper studies the strategic use and timing of share repurchases by insiders for personal gain. Using grant-level compensation data and a hand-collected sample of monthly repurchases, I find a positive causal relation between executive equity sales and share repurchases. I identify the relation using the vesting schedule of equity grants as an instrument for equity sales. This behavior is persistent across firm, executive, and governance characteristics. Both CFO and CEO vesting schedules impact repurchases, suggesting the CFO may also have influence over the execution of the repurchase program. There is minimal evidence of long-term value destruction. The results indicate executive contracts impact the execution of share repurchase programs.

The Effects of Independent Director Litigation Risk*

ABSTRACTDoes personal litigation risk for independent directors materially affect firm valuation, compensation‐related issues for independent directors, and board composition decisions? We use the unexpected In re Investors Bancorp decision in 2017 by the Delaware Supreme Court, which lowered the liability threshold only for directors in derivative litigation over their own equity grants and increased their future litigation risk, to examine these issues. Understanding changes in independent director litigation risk is important because such changes may affect directors' willingness or ability to serve on boards and advise executives. Consistent with our predictions, investors and firms reacted to the decision. First, Delaware firms experienced significant negative short‐window returns, concentrated in high‐litigation‐risk firms where equity compensation is most important. Second, Delaware firms responded by increasing the use of director compensation caps, highlighting that they did not pay excessive amounts. Third, Delaware firms with higher abnormal director compensation decreased director compensation, while those with lower abnormal director compensation did not. Finally, Delaware firms added higher‐quality directors to the compensation committee, consistent with concerns about heightened litigation risk for those positions. Notably, these new, higher‐quality directors did not accept lower pay, unlike holdover directors who previously served on the committee. Overall, results are consistent with director litigation concerns having a significant effect on shareholder value and firm and director behavior.

The Impact of the Corporate Calendar on the Timing of Share Repurchases and Equity Grants

The Impact of the Corporate Calendar on the Timing of Share Repurchases and Equity Grants

Executive Equity Compensation Plans and Board of Director Discretion over Equity Grants

Executive equity compensation is granted out of an equity incentive plan that must be approved by shareholders. Equity incentive plans are an important precursor to equity grants because plan terms give boards of directors discretion over the amount and features of equity that can be granted without further shareholder approval. We predict and find that equity plan proposals give boards more discretion over grants when the firm faces greater labor market competition and more volatile stock returns and when shareholders have less influence over the board. Shareholders vote less favorably for plans that confer greater discretion to boards but that relation weakens with labor market competition and shareholder influence. We also find evidence of more discretion facilitating larger equity grants in response to stock price declines. Overall our findings provide insights into the determinants of equity compensation plan characteristics that affect board discretion over equity grants and illuminates how firms balance needs to respond to labor market pressure and volatile operating environments against the governance and oversight of executive equity compensation.

The Participation Constraint and CEO Equity Grants

ABSTRACT We examine whether firms benchmark annual equity grants to compensation peers and whether meeting the participation constraint is a motive. Studying CEO equity grants over the period of 2006–2016 and compensation peers disclosed by the firm, we find that equity grants by these peers significantly determine a firm's equity grants. We find no evidence that the relation between a firm's and its peers' CEO equity grants is an indirect outcome of meeting peer total compensation levels. In contrast, we show that firms are more likely to meet peer equity grant levels when the labor market is more competitive and when losing key personnel is a risk factor. We also find that CEO turnover is more likely when the CEO receives lower equity grants than peers. Collectively, these findings are consistent with the theoretical prediction that benchmarking equity grants helps firms satisfy the participation constraint, which varies with performance. Data Availability: Data are available from sources cited in the text. JEL Classifications: G34; J33; J40; M12; M52.

Making Disclosure Work for Start-Up Employees

Equity-based compensation of startup employees is attracting growing and skeptical attention in academia and the media. Legal and finance scholars have raised concerns that employees are misinformed regarding the value of their equity grants in a manner that could distort their employment and investment decisions. This Article addresses these emerging concerns by articulating a theoretical and practical framework for the regulation of start-up employees’ human capital investments. This framework balances the confidentiality interests of employers with employees’ need for ongoing and realistic valuation of the return on their labor. Start-ups commonly rely on Rule 701 of the Securities Act to grant equity-based compensation to their employees without registering these securities with the Securities and Exchange Commission. This Article describes the flaws of the current regulation and proposes concrete amendments including (1) replacing the requirement to disclose the issuer’s financial statements with a requirement to disclose fair market valuation and exit waterfall analysis; (2) changing the threshold that triggers the enhanced disclosure requirement from when the company issues equity-based compensation exceeding $10 million within a twelve month period, to when the company issues securities to at least 100 employees, and these securities aggregately convey over 10% ownership in any class of shares; and (3) advancing the timing of the disclosure from its current post-employment stage to the offer letter stage.

Litigation Risk and the Independent Director Labor Market

After decades of declining litigation risk, independent directors of public companies are viewed as effectively immune to personal litigation costs. However, the unexpected In re Investors Bancorp decision by the Delaware Supreme Court in 2017 lowered the liability threshold only for directors in derivative litigation over their own equity grants. Investors and firms both reacted to this rare increase in director-only litigation risk. First, Delaware firms experienced significant negative short-window returns, concentrated in firms where equity compensation is most important, consistent with investor concerns about attracting and/or retaining qualified directors. Second, Delaware firms added more qualified directors to the compensation committee. Third, Delaware firms with higher abnormal compensation decreased director compensation. Finally, Delaware firms decreased discussion of director pay in 8-K filings and their use of compensation consultants. Overall, results are consistent with firms acting to mitigate litigation concerns.

Paying for impact: Venture philanthropy and social investing as funding models for integrated care

Introduction: The growing prevalence of chronic diseases and population aging are placing a heavy burden on healthcare systems around the world. In particular chronic disease patients would benefit from a better integration of their care, but integrated care also holds a big potential to generate value – better quality, patient experience and lower costs – for the healthcare system as a whole on the long term. To achieve these results in the future greater investment in integrated care is needed now. Venture philanthropy and social investing VP/SI, which utilizes mostly private investor and foundation money with – in general – the aims of both causing a positive, measurable social impact and making a financial profit although not all VP/SI feature the financial return piece – e.g. foundations, could be an alternative funding model to accelerate the necessary growth of integrated care. Policy context and objective: The 2015/16 survey of the European Venture Philanthropy Association EVPA highlights overall growth for the European VP/SI sector, 108 organizations allocated €6.5 billion between them since they began their operations, a 30% increase compared to 2013. The objective of this contribution is to highlight the distinctive features and models of VP/SI and elaborate potential opportunities for integrated care models to tap into this source of financing. Highlights: VP/SI is often implemented through direct private equity investments, debt, grants or fixed-income securities for social entrepreneurs. Alternatively also pay for success models, such as social impact bonds, social impact incentives, impact innovation challenges or shared saving models, gain in importance. In our contribution, we will discuss these different financial instruments and illustrate their applicability to financing integrated care by using examples of successful implementations around the world. One example, we will discuss is the German OptiMedis AG who secured a large six-digit equity investment by the social impact investment fund BonVenture to promote the further development and scaling of its population-based integrated care models. Further models from the UK, Mexico and other countries will be used to demonstrate pay for success models. Transferability: The ethos of VP/SI seems to be predestined for integrated care initiatives and could enable the development, testing, implementation and scaling of integrated care approaches. Unbound from the fragmented departmental approach of health care payer or state-funded projects, it may help to align the incentives of all stakeholders to maximize social impact. Conclusions: VP/SI offers great opportunities for integrated care approaches to attract necessary funding to achieve its aims and should also be evaluated by policy makers as alternative funding mechanism. However, the impact and value-based approach of VP/SI has also implications for integrated care insofar empirical evidence will gain in importance. The need for outcome-oriented evaluation and pay for success models will rise and evidence-based models will be preferred.

The efficiency of compensation contracting in China: Do better CEOs get better paid?

Over recent years, China adopted a number of ‘western-style’ reforms of corporate governance and executive compensation. We investigate whether boards of Chinese firms evaluate CEO ability and remunerate their CEOs accordingly, an essential tenet of efficient compensation contracting. Using Data Envelopment Analysis to measure CEO ability, we do not find any evidence that CEO ability matters in compensation contracting decisions—it does not lead to either higher pay, stronger pay-for-performance sensitivity, or a higher likelihood of equity grants. This is surprising, since we find evidence that higher ability CEOs achieve superior firm performance. In contrast, we find that powerful CEOs do not overperform, while they enjoy large abnormal pay. Overall, our results suggest that Chinese firms fail to embrace new corporate governance reforms and are unable to fully utilize the reforms’ benefits.

How the Design of CEO Equity-Based Compensation can Lead to Lower Audit Fees: Evidence from Australia

This paper investigates how the features of CEO equity-based compensation are associated with the agency costs of monitoring (measured by external audit fees) in an Australia setting. We find that audit fees significantly increase when firms award large equity grants to CEOs, which is consistent with the notion that auditors perceive higher risk associated with large equity incentives. However, by empirically testing auditors’ responses to the adoption of performance-vesting provisions, we document evidence that it is the use of accounting-based hurdles that potentially encourages unethical reporting issues. We report that audit fees are negatively associated with the use of market-based hurdles, while accounting-based hurdles lead to significantly higher audit fees but combination hurdles lower audit fees. To reduce the possible undesirable properties of accounting-based hurdles, firms adopt longer vesting periods to provide more balanced future-oriented incentives. Practical implications include the remuneration committee being aware of the hidden costs of poorly designed CEO compensation packages and avoiding undesirable ethical implications, particularly, where the CEO has significant power over the corporation.

Strategic News Releases in Equity Vesting Months

We find that CEOs release 20% more discretionary news items in months in which they are expected to sell equity, predicted using scheduled vesting months. These vesting months are determined by equity grants made several years prior and thus unlikely to be driven by the current information environment. The increase arises for positive news, but not neutral or negative news, nor nondiscretionary news. News releases fall in the month before and month after the vesting month. News in vesting months generates a temporary increase in stock prices and market liquidity, which the CEO exploits by cashing out shortly afterwards. Received August 29, 2014; editorial decision March 20, 2018 by Editor Laura Starks. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.