Stock Grants Research Articles

Foundation-controlled firms and CEO compensation

We explore the effects of foundation control on CEO incentive contracts. Unlike other blockholders, foundations do not consume the entirety of their cash flow rights, which attenuates the incentives of the controlling foundations to directly monitor the management. We present a simple model of moral hazard which predicts that foundation-controlled (FC) firms will resort to executive compensation as an alternative disciplining mechanism. Using a sample of listed Swedish family firms over the period of 2001–2014, we find that CEOs in FC firms are awarded more stock options compared to their peers in non-FC firms. The performance sensitivity of their option portfolios is also higher, but we do not find this to be the case for stock grants. Lastly, there is no conclusive evidence of differences in the levels of cash compensation. Our findings support the view that incentive contracts can substitute for large shareholder monitoring.

Ownership concentration and R&D investment: the moderating role of stock options

PurposeThis study aims to elaborate on how firms manage research and development (R&D) activities by examining the relationship between ownership concentration and corporate R&D investment, as well as the moderating role of stock options in this relationship.Design/methodology/approachThe study sample comprised 354 Chinese listed firms from 2011 to 2019, and the Tobit model and the system GMM test are used to check robustness.FindingsThe results reveal that ownership concentration and R&D investment have an inverted U-shaped relationship. In the presence of stock options, this inverted U-shaped relationship is significantly weaker.Originality/valueThe results have important managerial implications for firms that aim to grant stock options and improve the impact of ownership concentration on R&D investment strategies.

A prospective preconception cohort study of the association between Mycoplasma genitalium and fecundability in Kenyan women trying to conceive.

Is Mycoplasma genitalium-infection associated with reduced fecundability? Preconception M. genitalium-infection was associated with 27% lower fecundability though confidence intervals were wide, and the association between M. genitalium and fecundability may be dependent on concurrent bacterial vaginosis (BV). M. genitalium has been associated with cervicitis, pelvic inflammatory disease, infertility, and preterm birth, but the extent to which M. genitalium is causally related to adverse reproductive sequelae in women is debated. Kenyan women enrolled in a prospective preconception cohort provided vaginal fluid specimens and underwent monthly pregnancy testing. Stored samples from 407 women who had been trying to conceive for ≤6 months were tested for M. genitalium using a nucleic acid amplification test. Data on first day of last menstrual period, sexual behavior, pregnancy status, and vaginal specimens were collected at monthly preconception visits. The association between M. genitalium detected at the visit prior to each pregnancy test and fecundability was estimated using discrete time proportional probabilities models. Secondary analyses explored the influence of concurrent BV on the association between M. genitalium and fecundability. The 407 participants experienced 1220 menstrual cycles and 213 pregnancies. The prevalence of M. genitalium at enrollment was 7.7%. After adjustment for age, frequency of condomless sex in the last 4 weeks, and study site, M. genitalium was associated with a 27% lower fecundability, but confidence intervals were wide (adjusted fecundability ratio (aFR) 0.73, 95% CI 0.44, 1.23). In secondary analyses, when compared to cycles without M. genitalium or BV at the visit prior, women with both M. genitalium and BV at the visit prior had a 51% lower fecundability (aFR = 0.49, 95% CI 0.22, 1.09) whereas there was no association of M. genitalium alone (aFR = 0.98 (95% CI 0.54, 1.76)), and a smaller reduction in fecundability for women with BV only (aFR = 0.80 (95% CI 0.60, 1.07)). Results should be interpreted cautiously given the relatively low prevalence of M. genitalium and wide confidence intervals. In this cohort of Kenyan women trying to conceive, the association between M. genitalium and fecundability was influenced by concurrent BV status, suggesting there may be a synergistic effect of M. genitalium and BV on fecundability. This work was supported by a National Institutes of Health grant (NICHD R01 HD087346-RSM). R.S.M. received additional support for mentoring (NICHD K24 HD88229). E.M.L. was supported by pre- and post-doctoral fellowships (NIAID T32 AI07140, NICHD F32 HD100202). Data collection and management were completed using REDCap electronic data capture tools hosted at the University of Washington's Institute of Translational Health Science supported by grants from NCATS/NIH (UL1 TR002319). The content of this paper is solely the responsibility of the authors and does not necessarily represent the official views of the National Institutes of Health. R.S.M. receives research funding, paid to the University of Washington, from Hologic Corporation and consulting fees from Lupin Pharmaceuticals. L.E.M. receives research funding and material for research studies, paid to the University of Washington, from Hologic Corporation and Nabriva Therapeutics, travel support from Hologic, and consulting fees from Health Advances. E.M.L.'s contributions to this study primarily occurred while affiliated with the University of Washington; at the time of submission, E.M.L. was an employee of and holds stock or stock grants for AbbVie, Inc. The other authors have no conflicts of interest. N/A.

CEO compensation: Facts

In this paper we highlight a few striking features of CEO compensation in the US from 1994 to 2020. For the purpose of measuring both the level and sensitivity of compensation, we define the latter as the year–on–year change in the portion of the executive's wealth tied to the firm. Compared to a narrower definition often adopted in the literature to measure levels, the cross-sectional distribution displays much higher skewness and variation. Each year, a sizable fraction of chief executives lose money. During the second decade of this century, the award of options kept declining, while stock grants became more plentiful. In net, the dollar value of CEOs' position in their respective company did not keep up with the growth in capitalization. This contributes to explaining why the semi-elasticity of compensation with respect shareholder wealth has declined.

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.

P-030: CRIZANLIZUMAB REDUCES ENDOTHELIAL ADHESION OF RED BLOOD CELLS FROM SCD PATIENTS IN STANDARDIZED MICROFLUIDIC PLATFORM: IN VITRO TECHNOLOGY ASSESSMENT

Purpose: Crizanlizumab (ADAKVEO®, Novartis, Switzerland) a monoclonal P-selectin blocking antibody designed to disrupt the blood cells and endothelium interactions in sickle cell disease (SCD) patients, which leads to reduction of vaso-occlusive crises, the major manifestation of the disease. We report the novel microfluidic platform (endothelium-on-a-chip), to test the effects of Crizanlizumab on the adhesion of red blood cells (RBCs) to perfusion-cultured, acutely and chronically activated human endothelial cells (ECs). Materials and methods: Whole blood samples collected from SCD subjects (n=21), 20 HbSS and 1 HbSC in EDTA and sodium citrate. RBCs were isolated via centrifugation from whole blood and resuspended in basal cell culture medium (EBM; Lonza, Morristown, NJ, USA) at a hematocrit of 20% with 10 mM of HEPES. Human umbilical vein endothelial cells (HUVECs; Lonza, Morristown, NJ, USA) were cultured within the microfluidic platform channels at 15 dyne/cm2 for at least 48 hours prior to experiments. To mimic chronic pre-activation in SCD HUVECs were pretreated for 4 hours with heme (40 µM), TNFα (20 ng/ml) or 50% plasma of SCD patients in basal media, +/- 100 µg/ml Crizanlizumab followed by injection of blood samples through the microfluidic channels. For acute EC activation, blood samples were supplemented with 40 µM heme +/- 100 µg/ml Crizanlizumab and injected through the microfluidic channels for 15 minutes. Thereafter, non-adherent RBCs were rinsed via washing solution with or without Crizanlizumab and the remaining RBCs were quantified based on previous published methods. Paired t-test was used to calculate statistical significance. Results: The inhibitory effects of Crizanlizumab on blood cell adhesion to ECs was linked to the type and duration of EC activation (Fig. 1). Crizanlizumab slightly reduced RBC adhesion to 4-hours heme activated ECs (1170±413vs1671±522 p>0.05). Reduction of RBC adhesion due to Crizanlizumab treatment was significant in 15-minutes heme activated ECs (135±40 vs 1513±617, p≤0.05). The effect of Crizanlizumab on decreasing RBC adhesion was significant when ECs were pre-activated by TNF-α (4404±1393 vs 2016±609, p≤0.05) or subjects’ autologous plasma for 4 hours followed by a 15-minute heme activation (5876±2579 vs 2397±1381p≤0.05). Conclusion: In accordance with the label of Crizanlizumab to reduce VOC, application of microfluidic platform associated with Crizanlizumab use displayed a reduced RBC adhesion to acutely heme-activated EC. Effects were preserved in presence or absence of chronic TNFα or autologous plasma pre-activation. Endothelium-on-a-chip microfluidic platform has been shown as reliable in monitoring patient response to anti-adhesive therapies in SCD.Effects of Crizanlizumab on RBC adhesion levels to HUVECs activated for (A) 4-hours with heme (B) 15-minutes with heme (C) 4-hours with TNF-? and 15-minutes with heme, (D) 4-hours with plasma and 15-minutes with heme. Error bars represent the standard err J. ZAK declares a conflict of interest: Research support/Scientific studies: I am the Administrative Officer on several federal grants that support the development of the BioChip Labs assay platform: NIH phase I & II grant NSF phase I grant State of Ohio TVSF grant Stock shareholder: I am the founder of BioChip Labs Inc. and own a majority stake in the company Other: I hold the administrative title of CEO at BioChip Labs Inc. U. GURKAN declares a conflict of interest: Consultancy, Expert: Hemex Health Inc, BioChip Labs Inc Patent or product inventor: Hemex Health Inc, BioChip Labs Inc, Xatek Inc, DxNow Inc Research support/Scientific studies: Hemex Health Inc, BioChip Labs Inc, Stock shareholder: Hemex Health Inc, BioChip Labs Inc, Xatek Inc, DxNow Inc

Hidden Gems: Do market participants respond to performance expectations revealed in compensation disclosures?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants reveals unique information regarding future firm performance. Extracting inferred performance expectations from the disclosures, we find that firms disclosing the highest expected grant payout significantly outperform in ROA, Q, sales growth, and profit margin over the next two years, while those disclosing the lowest expected payout underperform. The embedded information is not captured by other information channels, such as managerial earnings guidance, 10-K sentiment, insider selling activities, unexplained CEO pay, and analyst forecasts. Investors and analysts do not fully incorporate the information and are later surprised around earnings announcement days. A portfolio that buys firms with the highest performance expectation and shorts firms with the lowest expectation earns significantly positive abnormal returns. Our findings suggest that the enhanced compensation disclosure contains valuable information, but investors underreact to information that is difficult to collect and process.

Import Penetration and Executive Compensation

Abstract We first compare several measures of import penetration and find that total imports, tariffs, and exchange rates are endogenous, while imports from China are largely exogenous. Then we examine the effects of Chinese import penetration on executive compensation of U.S. firms. We document that Chinese import penetration reduces executives’ stock grants and wealth-performance sensitivity, suggesting that competition mitigates agency problems and the need for conventional alignment mechanisms. 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.

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.

On buybacks, dilutions, dividends, and the pricing of stock‐based claims

AbstractWe develop a structural model of the firm that accounts for dilutions, resulting from interest payment shortfalls, and allows cash surpluses to be distributed under a payout policy that permits a combination of dividends and buybacks. Since the model tracks the number of outstanding shares, it can distinguish between claims dependent on the price of a share versus claims that depend on total equity. With a further extension of the model to incorporate employee stock grants, we demonstrate how the prices of traded stock options and employee grants are affected by payout policy. The impact of both dilutions and buybacks on traded option prices and employee grants is shown to be material. This magnitude is further illustrated through a case study involving five technology firms.

The Effect of Stock Ownership on Individual Spending and Loyalty

In this study, we quantify the effects of receiving stocks from certain brands on spending in the brand's stores. We use data from a new FinTech company called Bumped that opens brokerage accounts for its users and rewards them with stocks when they shop at previously elected stores. For identification, we use 1) the staggered distribution of brokerage accounts over time after individuals sign up for a waitlist and 2) randomly distributed stock grants. We find that individuals spend 40% more per week at elected brands and stores after being allocated an account. In response to receiving a stock grant, individuals increase their weekly spending by 100% on the granted brands. Beyond documenting a causal link between stock ownership and individual spending, we show that weekly spending in certain brands of our users is strongly correlated with stock holdings of that brand by Robinhood brokerage clients. Finally, we present survey evidence to argue that loyalty is the dominant psychological mechanism explaining our findings. We thus provide micro evidence for the idea that stock ownership drives brand loyalty, which is an intangible asset that leads to lower firm cash flow volatility.

Employee Financial Participation Plan Implementation in the United States and the Netherlands: Lessons for Indonesia

Employees have a major role in the sustainability of an organization. Employee satisfaction and business accomplishment are equally significant for the company’s sustainability. One of the strategies companies undertake to create a harmonious workplace and stimulate productivity is by giving recognition, awards and/or compensation to their employees. In recent years, equity-based compensation through employee financial participation plans has been becoming more popular. There are several tailor-made participation schemes which may vary among jurisdictions. There include Stock Grants, Direct Employee Stock Purchase Plans, Phantom Stock, Stock Appreciation Rights (SARs) and Employee Stock Ownership Plans (ESOP). Consequently, the employees could be the beneficiary owner of the shares or be actual shareholders in the company. When employees own shares, they will be treated as shareholders. Depending on the restrictions laid out in the employee financial participation plan. This means that employees could be involved in corporate governance in the company.

Required CEO stock ownership: Consequences for risk-taking and compensation

In response to corporate governance concerns, SEC disclosure rules, and pressure from Institutional Shareholder Services, most large U.S. public firms have adopted executive stock ownership requirements (‘SORs’) in recent years. Compared to CEOs already in compliance, CEOs who have not yet fulfilled the requirement at adoption subsequently increase stockholdings, exposing themselves to more company-specific risk, potentially providing risk-reduction incentives and diminishing their subjective valuation of firm equity. We find that these CEOs on average subsequently reduce firm risk through diversifying M&A, less financial leverage, and smaller R&D investment. They experience a deterioration in firm performance and valuation, each associated with firms that do reduce risk, but receive significantly increased stock grants. Our evidence suggests that boards should exercise judgment when adopting this popular governance initiative.

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.

Managerial Incentives and Its Credibility for Voluntary Announcements

In this research I find that stock market participants react differently to firms’ voluntary announcements depending on the credibility they lend to the announcing managers. Using a sample of 762 earnings forecasts for the period of 2002-2010 I study intraday trading behavior around the forecast announcements. The results indicate that investors take into account the term-structure of managerial incentives when they trade on the announced forecasts. In particular, I find that positive forecast surprises by the managers with larger short-term equity-based compensation are treated as less credible by investors and they sell. Furthermore, the results also show that the biggest source of market’s mistrust comes from short-term option grants. The opposite is true for the announcements by the CEOs with larger long-term equity-based compensation i.e. investors buy abnormally more following positive earnings forecasts, specifically when the announcing CEO incentives contain larger long-term stock grants.

Are CEOS Paid Extra for Riskier Pay Packages?

This paper quantifies the cost of CEO incentive compensation by estimating an elasticity of pay to the variance of pay. This metric is based on the benchmark moral hazard model widely used to study CEO pay. Using US CEO compensation data and a variety of empirical approaches, we find that CEOs with riskier pay packages are paid more. However, the estimated elasticity of pay to the variance of pay is small. This small elasticity implies a low risk aversion coefficient for CEOs and a risk premium that is at most 12% of total pay. This risk premium is about evenly split between compensation for risk in cash bonus, stock grants, and option grants. Overall, our findings suggest that incentive pay is not too costly for firms from a risk-diversification perspective, which may explain the heavy reliance on incentive pay by US firms, and cast doubt on the ability of the benchmark moral hazard model to explain CEO pay in the US.

Hidden Gems: Do Compensation Disclosures Reveal Performance Expectations?

We find that a new compensation disclosure item on expected payouts from performance-based stock grants contains incremental information of a firm’s future performance. Firms that disclose the most optimistic expected payment significantly outperform over the next two years, while the least optimistic firms underperform. Investors and analysts are slow to process the embedded information and are later surprised around earnings announcement days. A portfolio long stocks of the most optimistic firms and short the least optimistic ones earns significant positive post-disclosure abnormal returns. The result is more pronounced when the embedded “soft” information differs from the more visible earnings news.

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.