Equity Grants Research Articles

Intergenerational leadership: an extension of contemporary corporate social responsibility models

The following paper promotes the idea of intergenerational equity in the corporate world as Corporate Social Responsibility (CSR) means to coordinating the common goods and imbuing economic stability beyond a purely governmental approach. The outlined intergenerational equity constraints herald a call for intergenerational equity – the fairness to provide an at least as favorable standard of living as enjoyed today. As an implicit contract and transfer between living and future generations, intergenerational equity avoids discriminating against future generations and ensures future infrastructure, equal opportunities over time and constant access to social welfare for the youth. Intergenerational equity grants a favorable climate between generations and alleviates frictions arising from the negative impacts of intergenerational inequity. Outlining some of the causes of the current intergenerational imbalances regarding climate stability and overindebtedness prepares for recommendations on how to implement intergenerational transfers. The impact of intergenerational transfers on societal well-being is discussed. Future research avenues comprise of investigating situational factors influencing intergenerational leadership in the international arena in order to advance the idea of the private sector aiding on intergenerational imbalances and tackling the most pressing contemporary challenges of humankind.

Intergenerational Leadership: An Extension of Contemporary Corporate Social Responsibility (CSR) Models

The following paper promotes the idea of intergenerational equity in the corporate world as Corporate Social Responsibility (CSR) means to coordinating the common goods and imbuing economic stability beyond a purely governmental approach. The outlined intergenerational equity constraints herald a call for intergenerational equity – the fairness to provide an at least as favorable standard of living as enjoyed today. As an implicit contract and transfer in between living and future generations, intergenerational equity avoids discriminating against future generations and ensures future infrastructure, equal opportunities over time and constant access to social welfare for the youth. Intergenerational equity grants a favorable climate between generations and alleviates frictions arising from the negative impacts of intergenerational inequity. Outlining some of the causes of the current intergenerational imbalances regarding climate stability and overindebtedness prepares for recommendations on how to implement intergenerational transfers. The impact of intergenerational transfers on societal well-being is discussed. Future research avenues comprise of investigating situational factors influencing intergenerational leadership in the international arena in order to advance the idea of the private sector aiding on intergenerational imbalances and tackling the most pressing contemporary challenges of mankind.

Managerial Self-Interest and Strategic Repurchases: 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 CEO 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 stronger when the CEO is chairman of the board but otherwise is persistent across firm characteristics. However, these repurchases do not appear to destroy shareholder value. The results indicate CEO contracts motivate the timing of share repurchases.

Managerial gaming of stock and option grants

AbstractIn this paper, we examine managerial gaming of different types of equity grants, both at the initial award of the equity grants (front‐end gaming) and the unwinding of the equity holdings in the future (back‐end gaming). We find that the potential gains from stock price manipulation vary substantially across different types of equity grants. While traditional stock option grants are less vulnerable to front‐end gaming, they are more vulnerable to back‐end gaming than other types of equity grants (e.g., restricted stock grants). To prevent or discourage managerial gaming, firms should preset all terms of the equity grant in advance and link its future payoff to average stock prices (e.g., by granting Asian stock options).

Compensation Objectives and Business Unit Pay Strategy

ABSTRACTThis study investigates the effects of attraction, retention, and incentive objectives on business unit pay strategies in 173 European business units.Compensation theories provide conflicting implications regarding the use of various pay practices to achieve these objectives. We find that the positioning of cash pay levels relative to the labor market, the provision of benefits, and the breadth of employee eligibility for cash incentive plans and equity grants vary with the compensation objectives being pursued. Our evidence also suggests that some of these pay practices are complements while other are substitutes. Our ability to tie firms' objectives to elements of pay provides more direct evidence on how compensation policies are formed. Moreover, our evidence highlights the need to consider multiple compensation objectives when setting and studying pay strategies.

Equity Vesting and Investment

This paper links the CEO’s concerns for the current stock price to reductions in real investment. These concerns depend on the amount of equity he intends to sell in the short-term, but actual equity sales are an endogenous decision. We use the amount of stock and options scheduled to vest in a given year as an instrument for equity sales. Such vesting is determined by equity grants made several years prior, and thus unlikely driven by current investment opportunities. An interquartile increase in instrumented equity sales is associated with a decline of 0.25% in the growth of R&D/assets, 4.6% of the average R&D/assets ratio. Vesting-induced equity sales also increase the likelihood of meeting or marginally beating analyst earnings forecasts, and are associated with higher returns to earnings announcements. More broadly, by introducing a measure of incentives that is not driven by the current contracting environment – vesting-induced equity sales – our paper suggests that CEO contracts affect real outcomes.

Benchmarking, Incentive Rebalancing, and the Influence of Labor Market Competition on CEO Equity Grants

We examine the extent to which participation constraints influence CEO annual equity grants. Studying CEO equity grants over the period 2006-2016 and using equity grants to compensation peers as a proxy for the reservation equity grant level, we find that the reservation wage in equity is a determinant of the magnitude of equity grants. We also find that firms are more likely to meet the peer grant levels when there is higher labor market competition and when the firm discloses that key personnel is a risk factor. CEO turnover is more likely when the firm grants equity below the peer level. Further, firms are less likely to meet peer equity grant levels and increase cash compensation when the CEO holds a large portfolio of equity incentives. Overall, the results suggest that the participation constraint influences annual equity grants and that firms consider the potential costs of providing too much equity.

M&A deal initiation and managerial motivation

This paper contributes to our understanding of managers' motivations for initiating the sale of their company. Using a sample of 1098 publicly-listed US target firms with completed deals, we show that deals initiated by the target firm rather than by outside bidders have higher CEO ownership. Furthermore, CEOs are motivated to offer their firms for sale also by higher golden parachutes, stock and stock option grants prior to takeovers. Our results suggest that motivated CEOs participate actively in deal negotiations, rather than being bribed not to resist the deal. In target-initiated deal firms, CEO ownership and equity grants are also positively correlated with takeover premiums.

Vicarious Liability for Managerial Myopia

AbstractThis paper shows that fines on the firm (vicarious liability) can optimally deter misreporting by the firm’s manager. In a principal-agent model, shareholders choose whether to award equity compensation to a myopic (short-termist) manager. Equity induces effort and misreporting. The wedge between managerial and shareholders’ time horizons provides a measure of agency costs; more-myopic managers tend to misreport more, which increases expected fines. In equilibrium, large decreases in agency costs lead to more equity grants and more misreporting and are consistent with greater shareholder welfare. Social effects are, however, ambiguous given misreporting externalities. Counterintuitively, decreases in agency costs may decrease social welfare if vicarious fines are set too low: shareholders will award equity and induce misreporting even when not justified by the accompanying economic production. The proper level of vicarious fines results in a second-best optimum where shareholders award equity if, ...

Managerial Compensation and Firm Value in the Presence of Socially Responsible Investors

Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal–agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders’ preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation is necessarily inconsistent with the attainment of social objectives.

Intergenerational Leadership: Coordinating Common Goods and Economic Stability

Globalization leveraged pressure on contemporary society. Global systemic risks of climate change and overindebtedness in the aftermath of the 2008/09 World Financial Crisis currently raise attention for intergenerational fairness. Pressing social dilemmas beyond the control of singular nation states call for corporate social activities to back governmental regulation in crisis mitigation. The following paper promotes the idea of intergenerational equity in the corporate world as an alternative means to coordinating the common goods and imbuing economic stability beyond a purely governmental approach. The outlined intergenerational equity constraints herald a call for intergenerational equity – the fairness to provide an at least as favorable standard of living as enjoyed today. As an implicit contract and transfer inbetween living and future generations, intergenerational equity avoids discriminating against future generations and ensures future infrastructure, equal opportunities over time and constant access to social welfare for the youth. Intergenerational equity grants a favorable climate between generations and alleviates frictions arising from the negative impacts of intergenerational inequity. Outlining some of the causes of the current intergenerational imbalances regarding climate stability and overindebtedness prepares for recommendations on how to implement intergenerational transfers. The impact of intergenerational transfers on societal well-being is discussed. Future research avenues comprise of investigating situational factors influencing intergenerational leadership in the international arena in order to advance the idea of the private sector aiding on intergenerational imbalances and tackling the most pressing contemporary challenges of mankind.

M&A Deal Initiation and Managerial Motivation

On a sample of 1098 US publicly listed target firms, we show that target initiated deals face potential financial distress and have higher CEO ownership. We further show that CEOs are motivated to offer their firm for sale due to their higher ownership, golden parachutes and stock and stock option grants before the takeover. Moreover, motivated CEOs seem to actively participate in deal negotiations rather than be just bribed not to resit the deal and their ownership and equity grants are positively correlated with premium. This suggests a positive role for deal initiation for target shareholders.

CEO Compensation and Risk Taking: The Moderating Effect of CEO Personality

We advance our understanding of how the different dimensions of personality are likely to moderate CEO responses to cues offered by equity grants. We do so by drawing upon the five-factor model of ...

Intergenerational Equity in the Eye of Overindebtedness

Globalization leveraged pressure on contemporary society. One of today's most pressing social dilemmas between generations arise from overindebtedness. In the aftermath of the 2008/09 crisis, budget crises around the world led to austerity plans triggering an economic climate of stagnation, federal spending constraints and prospected social welfare decline for decades to come. Outlining the causes of the current overindebtedness crisis in the Western world prepares for an analysis of the consequences of governmental budgetary constraints. The impact of governmental austerity plans on societal well-being is discussed. Potential overindebtedness remedies are reflected upon with a focus on the US and Europe. The outlined intergenerational equity constraints herald a call for intergenerational equity – the fairness to provide an at least as favorable standard of living as enjoyed today. As an implicit contract and transfer in between living and future generations, intergenerational equity avoids discriminating against future generations and ensures future infrastructure, equal opportunities over time and constant access to social welfare for the youth. Intergenerational equity grants a favorable climate between generations and alleviates frictions arising from the negative negative impacts of overindebtedness.

Management Team Incentive Alignment and Firm Value

Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design (Edmans et al. 2013). We focus on Pay Performance Sensitivities (PPS) and use dispersion in PPS across top executives as a proxy for the incentive design component shaped by an executive team’s synergy profile. We model optimal PPS dispersion and use residuals from this model to measure deviations from optimal. We find that firm performance is increasing (decreasing) in the residual when PPS dispersion is too low (too high). We conjecture that deviations from optimal are sustained by adjustment costs, finding that firms only close around 60% of the gap between target and actual PPS dispersion over the subsequent year. Viewing a team’s equity grants as a vector, we provide evidence that firms use subsequent equity grants to actively manage PPS dispersion towards optimality. Cross-sectional analysis reveals that the deleterious effect of deviations from optimal is decreasing in the duration of a team’s tenure together, and increasing in the importance of effort coordination across team members for firm performance.

Management Team Incentive: Dispersion and Firm Performance

ABSTRACT Recent theory suggests that firms incorporate synergistic interrelationships among executives into optimal incentive design (Edmans, Goldstein, and Zhu 2013). We focus on Pay Performance Sensitivities (PPS) and use dispersion in PPS across top executives as a proxy for the incentive design component shaped by an executive team's synergy profile. We model optimal PPS dispersion and use residuals from this model to measure deviations from optimal. We find that firm performance is increasing (decreasing) in the residual when PPS dispersion is too low (too high). We conjecture that deviations from optimal are sustained by adjustment costs, finding that firms only close around 60 percent of the gap between target and actual PPS dispersion over the subsequent year. Viewing a team's equity grants as a vector, we provide evidence that firms use subsequent equity grants to actively manage PPS dispersion toward optimality. Cross-sectional analysis reveals that the deleterious effect of deviations from optimal is decreasing in the duration of a team's tenure together, and increasing in the importance of effort coordination across team members for firm performance. JEL Classifications: M41.

Strategic News Releases in Equity Vesting Months

We show that CEOs reallocate news releases into months in which their equity vests, and away from prior and subsequent months. CEOs release 7% more discretionary news in vesting months than in prior months, but there is no di fference for non-discretionary news. These vesting months are determined by equity grants made several years prior, and thus unlikely driven by the current information environment. Discretionary news releases in vesting months lead to favorable media coverage, suggesting they are positive in tone. They also generate a temporary run-up in stock prices and market liquidity, which the CEO exploits by cashing out shortly afterwards.

Managerial Compensation and Firm Value in the Presence of Socially Responsible Investors

Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal-agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders' preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation are necessarily inconsistent with the attainment of social objectives.

The Role of Executive Stock Options as Insurance for CEOs Against Hold-Up

Following Oyer (2004) and Rajgopal, Shevlin and Zamora (2006), we provide evidence that the level of stock option compensation results from outside opportunities in the managerial labor market for a sample of 3,214 CEO-year observations from S&P1500 companies between 1996 and 2010. We argue that stock-based compensation converts into severance pay in the case of forced CEO departure. Consistent with Almazan and Suarez (2003), we argue that severance pay protects CEOs' relation-specific investments from hold-up by firms. Our analysis also provides some evidence that equity grants are inversely related to labor market competition in the penultimate year of forced CEO departure.

Equity Vesting and Managerial Myopia

This paper links the CEO’s concerns for the current stock price to reductions in real investment. We identify short-term concerns using the amount of stock and options scheduled to vest in a given quarter. A one standard deviation increase in vesting equity is associated with an annualized 0.2% decline in growth in R&D plus net capital expenditure (scaled by total assets), 11% of the average investment-to-assets ratio. Vesting equity is also associated with positive analyst forecast revisions and positive earnings guidance during the same quarter. More broadly, by introducing a measure of incentives that is determined by equity grants made several years prior, and thus unlikely to be driven by current investment opportunities, our paper provides evidence that CEO contracts affect real decisions.