Restricted Stock Grants Research Articles

Risk Preferences of Gender‐Diverse Boards: Evidence from CEO Debt‐like Compensation

AbstractWe hypothesize that gender‐diverse boards manage CEO risk‐taking preferences through the debt‐like component of CEO compensation. We provide empirical evidence of a strong positive association between the proportion of independent female directors and debt‐like pension compensation for a sample of US firms. Our key results are robust to a least‐squares framework that includes firm fixed effects to address potential omitted variable bias, and we also find evidence that higher proportions of independent female directors are associated with lower CEO option compensation and more intensive use of restricted stock grants. We obtain corroborating results from a difference‐in‐differences approach using California's 2018 board gender quota law (SB 826) as a quasi‐experiment. Consistently, gender‐diverse boards reduce the cost of debt among firms that are closer to financial distress and for longer maturity bond issues.

Difficult but Achievable: Risk-Taking Incentive in Performance-Vested Restricted Stock Grants and Corporate Innovation

Difficult but Achievable: Risk-Taking Incentive in Performance-Vested Restricted Stock Grants and Corporate Innovation

CEO ownership and firm performance: Evidence from the 2003 dividend tax cut

AbstractThis study investigates the performance consequences of changes in the optimality of chief executive officer (CEO) ownership by using the 2003 dividend tax cut (DTC) as an exogenous shock. I find that CEO ownership of dividend payers significantly increased after the DTC in the form of higher annual restricted stock grants and more option exercises. I also document that more optimal ownership is associated with performance improvement and more efficient R&D investment. Overall, findings from my study provide insights into the role of managerial equity incentives for firm performance.

Unpacking the dynamics of a contested practice: the case of executive compensation and the shareholder value orientation in the USA

AbstractThe corporate scandals and market crashes of the 2000s generated significant criticism of the shareholder value orientation (SVO) in the USA. We offer a sociopolitical analysis of how this criticism triggered changes in stock-based executive compensation, a central practice associated with the SVO. We first analyze how corporate stakeholders redefined different forms of stock-based compensation, motivated new regulations and wielded direct challenges to specific firms. We then predict how firm-specific differences in external challenges and intra-firm power relationships were related to changes in the use of stock options and restricted stock grants (RSGs), testing our predictions using a longitudinal dataset of S&P 500 executives between 2002 and 2012. We find that firms facing negative media coverage of their executive compensation practices made less use of both forms of stock-based compensation, while firms facing shareholder activism only made less use of stock options, the form that was more heavily criticized. In addition, firms with more powerful CEOs utilized RSGs more heavily and did so even when facing media criticism. Our findings demonstrate that while stock options were vulnerable to change, stock-based compensation remained resilient because the structural power of CEOs, a core corporate governance feature of the SVO, also remained resilient.

CEO compensation, portfolio holdings and strategic investments

PurposeThe purpose of this paper is to examine the relationship of CEO compensation plans and the risk of managerial equity portfolios with the extent of strategic investments in advertising, capital expenditures and research and development (R&D). The elements of compensation are salary, bonuses, options and restricted stock grants. The authors proxy the design of CEO equity portfolios by the price performance sensitivity of the holdings and the portfolio deltas.Design/methodology/approachThe authors use the components of executive compensation and portfolio risk as the dependent variables, regressing these against measures for the level of strategic investment. The authors test for non-linear relationships between the components of CEO compensation and strategic investments. The sample is a broad cross-section from 1992 to 2016.FindingsThe authors find strong support for non-linear relationships of capital expenditures and R&D with CEO bonuses, option grants and restricted stock grants. There are very complex relationships between the components of executive compensation and R&D expenditures, but little evidence of a relationship with advertising expenditures. The authors also find strong complex relationships in the design of CEO equity portfolios with advertising and R&D.Originality/valueLittle earlier research has considered advertising, capital expenditures and R&D in a unified framework. Also, testing for non-linear associations provides much greater insight into the relationship between the components of executive compensation and strategic investment. The findings represent a valuable incremental contribution to the executive compensation literature. The results also have normative policy implications for compensation committees’ design of optimal annual CEO compensation packages to incentivize or discourage particular strategic investment behavior.

A Comparison of Restricted Stock Grants Between Dual‐Class and Single‐Class Companies

In recent years, quite a few new economy‐type companies have chosen a dual‐class stock structure. However, industry, investors, and academia have never reached consensus regarding such a structure. Under this context, this article investigates how dual‐class and single‐class firms apply performance‐based and time‐based restricted stock in compensating their executives to shed light on the debate. Results suggest dual‐class and single‐class firms pay similar amounts of stocks to their CEOs. Cash bonus payment accounts for larger percentage within total compensation and stock compensation accounts for a smaller percentage in dual‐class firms relative to single‐class firms. Dual‐class companies are less likely to use performance‐based and time‐based stock awards. Additionally, dual‐class firms vest their performance‐based stock grants over shorter periods compared with single‐class firms, but both types of firms vest their time‐based stock grants over similar periods. CEOs in dual‐class firms do not always receive stock compensation awards as quickly as those in single‐class firms. For performance‐based stock grants, a ratable vesting method is less common, but the cliff vesting method is more common in dual‐class firms. Such vesting arrangements of stock awards in the compensation plan motivate CEOs in dual‐class firms to target and meet long‐term growth goals and protect shareholders' interests.

The impact of dividend-protected CEO equity incentives on firm value and risk

Stock options and restricted stock are the two main vehicles of equity-based compensation. In this paper, we analyze how different dividend treatment of stock options and restricted stock grants impacts stock price and the riskiness of the firm. We find that if a firm's manager's utility function includes contemporaneous dividends (as in the case of restricted stock grants), the manager increases the risk level of equity in order to maintain the preferred risk level of her utility function. Increased risk level negatively impacts stock price, ceteris paribus. However, the calibrated model reveals that the impacts are rather trivial, specifically, equity value is lower by 1.5% and leverage is greater by 4%.

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).

Executive Compensation and Ethnic Minority Status

We examine the compensation of ethnic minority executives in listed U.S. firms. The total pay of African American executives is 9 percent lower than that earned by Caucasians. This is due to lower base salary, lower bonus, and lower restricted stock grants. The lower bonus is due to a lower sensitivity to above‐average firm performance. African Americans also earn significantly less on the exercise of stock options, increasing the pay gap to 17 percent for total ex‐post pay. In contrast to African Americans, the compensation of Hispanic and Asian executives is comparable to Caucasians.

Is adoption of restricted stock grants related with firm performance?

Abstract This study investigates whether a firm's past or future performance is related with the adoption of restricted stock grants. In addition, it also explores the relation between conditions of adopting restricted stock grants and firms' future performance. Empirical results show that there is no significant relationship between firms' past performance and the adoption of restricted stock grants. By contrast, improved future performance is found for companies adopting this compensation policy. Further, the incentive effect of restricted stock grants could be improved by extending the vesting service period, increasing the expenses amount of restricted stock grants, and decreasing the reduction in EPS. This article contributes to the serious lack of restricted stock grants literature in Taiwan. Also, it may offer some implications to companies considering the compensation scheme of restricted stock grants.

Comments on Shan and Walter: ‘Towards a Set of Design Principles for Executive Compensation Contracts’

This paper is developed around the set of design principles for executive compensation contracts as outlined in the study of Shan and Walter (2014). We propose guidance for determining an appropriate CEO starting compensation level based on past performance and the market for managerial talent. We also outline factors to be considered in determining annual changes to CEO compensation. This paper argues that stock options and restricted stock grants should become exercisable only upon meeting both time and performance criteria against an appropriate benchmark peer group. We agree with Shan and Walter’s (2014) recommendations regarding termination payments and make suggestions on how to apply these recommendations in practice.

Valuing restricted stock grants to non-executive employees

We estimate the value of restricted stock (RS) grants to non-executive employees using a unique proprietary database by calibrating theoretical models that account for the non-marketability of securities and the potential effects of the employee's non-diversification. The calibration results predict an average discount of 30.3% on the RS grant. This discount depends on firm and industry characteristics, is significantly higher during the financial crisis and robust across time and across industries. The discount increases when the employee is undiversified because of the granted stocks. The findings contribute to the discussion on the efficiency of RS grants to non-executive employees, which became a dominant form of equity-based compensation.

Equity‐based incentives and collaboration in the modern multibusiness firm

Research summary: This paper examines the role of equity‐based incentives in fostering cross‐business‐unit collaboration in multibusiness firms. We develop a formal agency model in which headquarters offers equity and profit incentives to business‐unit managers with the objective of maximizing total expected firm returns. The resulting compensation contract provides a rich mechanism for aggregating value from collaborative interactions across business units, aligning managers' efforts with the firm's growth prospects and organization structure and managing the dual risks in profits and firm market value. The inclusion of equity incentives elicits higher levels of own‐unit and collaborative efforts over the profits‐only contract. Our results suggest that equity‐based incentives are most beneficial when profitability is uncertain relative to long‐term growth prospects, in firms pursuing related diversification strategies, and in periods of rising equity markets.Managerial summary: Equity‐based compensation such as restricted stock grants and options are increasingly common, not only for CEOs and other top executives, but also for business unit managers and other non‐C‐suite employees. The paper studies the role of such “global” incentives in enabling multibusiness firms to benefit from cross‐unit collaboration. Results from our model show that managerial contracts that include appropriate levels of equity incentives, in addition to profit‐based incentives, generate higher own‐unit and collaborative efforts. We also find that equity incentives are likely to be most beneficial for large firms in high‐growth sectors, for firms pursuing a related diversification strategy, and in periods of rising stock markets. The model can also provide useful guidance on designing return‐maximizing compensation contracts for business unit managers in different firm, organizational, and industry contexts. Copyright © 2015 John Wiley & Sons, Ltd.

The Cost and Value of Restricted Stocks Grants

We estimate the value of restricted stock (RS) grants to non-executive employees using a unique proprietary database by calibrating theoretical models that account for the non-marketability of securities and the potential effects of the employee's non-diversification. The calibration results predict an average discount of 30.3% on the RS grant. This discount depends on firm and industry characteristics, is significantly higher during the financial crisis and robust across time and across industries. The discount increases when the employee is undiversified because of the granted stocks. The findings contribute to the discussion on the efficiency of RS grants to non-executive employees, which became a dominant form of equity-based compensation.

Agency Costs and Equity Mispricing

AbstractWe investigate a link between agency costs and equity mispricing. We employ comprehensive, multi‐dimensional measures of agency costs and mispricing, and find that mispricing is significantly and positively related to agency costs. We also explore the effect of equity‐based compensation on the impact of agency costs on mispricing. Our investigation extends previous studies that do not separately account for the options and restricted stock grants components of equity‐based compensation. We show that stock options, originally intended to resolve conflicts of interest, exaggerate the problem and this phenomenon is pronounced especially when firms are overvalued. Overall, our results imply that compensation packages that are not structured optimally could lead to greater mispricing.

Does Compensation Structure Alleviate Personal CEO Risks?

Abstract: Are CEO compensation packages designed to alleviate some of the personal risks that they bear? We employ a unified framework to test the relationship between the four major components of executive pay; salary, bonuses, option grants and restricted stock grants, and four factors that increase CEOs’ personal risks; the real value of their pay, the riskiness of firm equity, the value of their equity portfolios, and the delta of these equity holdings. We show that personal risks that CEOs face have significant effects on the design of their compensation contracts. Our results suggest that the portion of salary compensation decreases many of the personal risks that they face. There are intriguing differences between salary and bonuses on one hand, and option and restricted stock grants on the other. As predicted, we find that the delta of CEOs’ equity portfolios have strong nonlinear relationships with the different forms of compensation; especially with option grants.

The Valuation Differences Between Stock Option and Restricted Stock Grants for US Firms

Abstract: In this study, we document a significant shift over the past several years from stock option‐based compensation to restricted stock‐based compensation. Additionally, we evaluate whether stock option grants and restricted stock grants result in similar valuation consequences for firms. We estimate cross‐sectional valuation equations that include the value of stock option and restricted stock grants summed over the current and past two years, residual income, and book value of equity, after controlling for endogeneity. Consistent with prior research, our findings indicate that the market on average values stock option grants positively. However, in contrast to stock option grants, restricted stock grants are valued negatively. This result is consistent with restricted stock grants lacking the positive incentive effects of stock options and being viewed as a liability or expense to the firm.

A Dual Role for Restricted Stock Grants

Restricted stock grants are generally modeled as an alternative incentive creation device to stock option grants. Given that incentive option grants are not dividend-protected while restricted stock grants carry dividend entitlements, we propose a dual role for restricted stock when granted simultaneously with options. We find that CEOs of dividend-paying stocks who are incentivized by option grants are effectively protected against dividend risk by simultaneous grants of restricted stock. We further show that the hedge rationale empirically dominates a delta maintenance rationale that follows when firms seek to maintain the option delta for the option term. Our evidence has major implications for all models and empirical analyses that assume restricted stock grants operate purely as incentive devices.

Stockholder and Bondholder Wealth Effects of CEO Incentive Grants

We examine stock and bond price reactions to CEOs’ first stock option and/or restricted stock grants that appear on ExecuComp. We find positive stock price and negative bond price reactions. Changes in CEO pay‐performance (delta) and stock volatility (vega) sensitivities relate to the reactions. Stock reactions decrease with the change in delta and increase with the change in vega. Bond reactions are the opposite and depend on the CEO's prior equity ownership. Stockholder and bondholder wealth effects are negatively correlated for grants that cause a large change in the vega of CEO wealth, consistent with aggravated risk‐shifting incentives.

The Economics of Restricted Stock and the Section 83(B) Election

As restricted stock is increasingly important in compensation packages, understanding its unique institutional features becomes paramount. We study the interplay between tax and incentive attributes to show how management appears to be utilizing a unique tax election to generate firm benefits. Interestingly, theoretical models predict a firm’s indifference to an employee’s acceleration of income recognition of restricted stock grants (i.e., make an I.R.C. Section 83(b) election). However, our empirical evidence shows otherwise. Our comparison of a sample of firms that restrict the election to a sample of firms that does not confirms that firms prohibit the election to minimize taxes whereas they require the election for incentive purposes.