How employee stock options and executive equity ownership affect long-term IPO operating performance

To ascertain whether the form of managerial compensation affects a firm's long-term operating performance, we track IPOs for 5 years after the expiration of the stabilization period. New public companies perform better when managers receive a balanced combination of stock option grants and equity ownership. Firms with unbalanced compensation arrangements, large option grants and little equity ownership or vice versa do not perform as well. This empirical finding is consistent with a theoretical explanation based on managerial risk aversion and the alignment of managerial and owner incentives.     

Real options and earnings-based bonus compensation

This study extends the works of Mauer and Sarkar (2005) and Andrikopoulos (2009) by incorporating a regime-dependent earnings-based bonus into managerial compensation. Examining the individual effects of ownership shares and earnings-based bonus compensation, we find that the former provides managers with incentives to issue debt, whereas the latter induces the opposite result, although consistent impacts are found for the two types of compensation on both agency costs and the optimal investment decisions of managers. When managerial compensation comprises both ownership shares and an earnings-based bonus, there are significant differences in the effects of these two types of performance compensation on managers’ optimal investment and financing decisions, agency costs, optimal debt ratios and credit spreads, as a result of the specific interactions between the investment and financing decisions.     

Does capital market drive corporate investment efficiency? Evidence from equity lending supply

The increased equity lending supply (ELS) in the equity loan market, available for short sellers to borrow, exposes a firm to greater short selling threats. Considering short sellers' strong incentives to uncover firm-specific information and monitor managers, we hypothesize that short selling threats, proxied by ELS, enhance corporate investment efficiency. We find that ELS significantly reduces managerial tendencies to underinvest (overinvest) especially for firms prone to underinvest (overinvest). The effect of ELS on investment efficiency is stronger for firms with higher information asymmetry and weaker corporate governance, confirming short sellers' role in mitigating information and agency costs. However, short selling risk weakens the effect of ELS. Our evidence is robust to endogeneity checks and suggests that corporate investment can be driven by a particular capital market condition: the amount of lendable shares in the equity loan market.     

Group affiliation, identity of managers, and the relation between managerial ownership and performance

Two features in Taiwan's companies complicate the ownership-performance relationship. First, the firm's management is usually controlled, either directly or indirectly via equity interlocks, by the controlling family. The shareholding of managers is an access through which the controlling owners can secure control and entrench their private benefits. Second, the management generally consists of individual managers and representatives appointed to top managerial positions by institutions that hold a substantial percentage of shares. The role of corporate managers played by institutions is important in Taiwan's companies. Echoing these two features, empirical results suggest a low inflection point for the nonlinear relation between managerial ownership and performance. Moreover, the impact of managerial ownership on performance varies between different identities of managers and depends on whether the firm is group-affiliated or independent. There is also evidence to show that the relation between individual and institutional managerial ownership is complementary at low levels of ownership and becomes substitutive as ownership gets higher.     

Corporate investment and stock market valuation

We study the driving forces behind the positive association observed between corporate investment and stock market valuation, and how they interact with managerial equity incentives and informativeness of investment. We build a dynamic model where managers use investment choices to influence investors' opinions about firms' future prospects and increase the market valuation. The incentives to manipulate the valuation processes increase with managerial equity incentives and informativeness of investment. Our empirical findings support the model's predictions that the tendency of using investment to boost market valuation is stronger when managerial stock ownership is high or when earnings quality is low (i.e., there is strong reliance on investment for information).     

Reexamining the managerial ownership effect on firm value

Whether equity-based compensation and equity ownership align the interests of managers with stockholders is an important question in finance. Early studies found an inverted U-shaped relation between managerial ownership and firm value, but later studies using firm fixed effects found no relation. Managerial ownership levels change very slowly over time which may mask an ownership effect on firm value when using a fixed effect model. This is due to a much smaller within firm variation than between firm variation. We demonstrate that using pay-performance semi-elasticity, rather than pay-performance sensitivity as a measure of managerial ownership incentives, results in meaningful variation within firm over time. The greater within firm variation increases the power to detect a relation between managerial ownership and firm value with fixed effect regressions. As in the early research on this issue, we find a significant inverted U-shaped relation between managerial ownership and Tobin's Q in fixed effects regressions and after controlling for endogeneity with both two-stage and three-stage least squares regressions. Our results are consistent with incentive alignment at low levels and risk aversion at high levels of managerial ownership.     

Pre-IPO ownership structure and its impact on the IPO process

We investigate the impact of pre-issue ownership structure on the key decisions surrounding an IPO. We find that managerial ownership is significantly related to (1) the proportion of shares offered, (2) share allocation, and (3) direct issue-related expenses. This suggests that pre-IPO ownership by managers influences their incentive to maintain control and to lower the cost of going public. In comparison, large pre-IPO non-managerial shareholders are more concerned about exiting, and their presence tends to increase issue size and costs. Our findings indicate that differences in pre-IPO owners’ incentives and bargaining power as implied by their pre-IPO shareholdings can significantly influence the IPO process.     

中国式卖空机制与高管减持——基于融资融券分步扩容的准自然实验

本文以我国的融资融券制度为背景,结合双重差分模型,研究卖空机制对上市公司高管减持行为的影响。研究发现,相对于非融券标的,可融券标的公司高管的月减持比例在允许卖空后下降22%,这种抑制作用在小规模、高盈余平滑度以及非国有公司中体现得更为明显。其次,成为可融券标的后,股价定价效率提高,高管减持收益显著下降。进一步地,本文将高管的减持行为分为定期性与投机性两类,发现卖空机制显著抑制了高管基于信息优势和股价偏差的投机性减持行为。     

Managerial ownership dynamics and firm value

From 1988 to 2003, the average change in managerial ownership is significantly negative every year for American firms. We find that managers are more likely to significantly decrease their ownership when their firms are performing well and more likely to increase their ownership when their firms become financially constrained. When controlling for past stock returns, we find that large increases in managerial ownership increase Tobin's q. This result is driven by increases in shares held by officers, while increases in shares held by directors appear unrelated to changes in firm value. There is no evidence that large decreases in ownership have an adverse impact on firm value. We rely on the dynamics of the managerial ownership/firm value relation to mitigate concerns in the literature about the endogeneity of managerial ownership.     

Rewarding risk-taking or skill? The case of private equity fund managers

We examine whether typical private equity fund compensation contracts reward excessive risk-taking rather than managerial skill. Our analysis is based on a novel model of investment value, cash flows, and fee dynamics of private equity funds. Given the embedded option-like fee components, our results demonstrate that fund managers indeed have an incentive for excessive risk-taking when only fee income from the current fund is considered. However, when managers also consider potential compensation from follow-on funds, their risk-taking incentives depend on their individual skill levels, and skilled managers will have an incentive to reduce fund risk. We also show that managers must generate substantial abnormal returns in order to compensate investors for the given fee components.     

Managerial shareholding policies and retention of vested equity incentives

Previous literature documents that executives tend to cash out equity incentives when equity-linked compensation vests. Such a behavior destroys long-term incentives and hence is costly to outside shareholders. It is recommended that the unloading of incentives can be limited when the firm adopts a minimum executive shareholding policy. We provide the first evidence of the effectiveness of such policies in that respect. Using data for UK FTSE 350 companies we show that executives whose ownership is below the minimum set by the policy retain more newly vesting equity and the incentives to retain shares weaken when the holdings are above the minimum. We also document economic implications of compliance with the policy and we find higher firm valuations when actual ownership increases relative to the minimum holdings required. Our results have implications for the debate on executive remuneration regulations and practices.     

Identifying the effect of managerial control on firm performance

Using a unique sample, we attempt to identify the consequence of the separation between inside ownership and control for firm performance. We exploit the fact that banking institutions may hold their own shares in trust to construct a clean measure of the wedge between inside voting control and cash flow rights. These shares provide managers with no monetary incentives, since their dividends accrue to trust beneficiaries. However, managers may have the authority to vote these shares. Contrary to the belief that managerial control is purely detrimental, we find that it has positive effects on performance over at least some range.     

Large shareholders and disclosure strategies: Evidence from IPO lockup expirations

We examine the effect of large shareholders? ex ante selling incentives on firms? voluntary disclosure choices in the setting of IPO lockup expirations. We find evidence that managers delay disclosures of bad news, not for their own benefit, but to enable influential pre-IPO shareholders to sell their shares at more favorable prices. Delays are more pronounced when aggregate selling incentives are greater, when uncertainty is high, and when venture capitalists, influential investors with strong selling incentives, own more shares. Simultaneously, managers? disclosure decisions reflect litigation concerns; no significant delays occur when litigation risk is high or when managers trade themselves.     

The performance effect of managerial ownership: Evidence from China

By examining a sample of non-listed Chinese firms, we provide the first evidence from China for the effect of managerial ownership on firm performance. In matching-sample comparisons, we find that firms of significant managerial ownership outperform firms whose managers do not own equity shares. Our further results indicate the relation between firm performance and managerial ownership is nonlinear, and the inflection point at which the relation turns negative occurs at ownership above 50%. Compared with previous studies, our results are less likely to suffer from an endogeneity problem due to the non-list nature of our sample and the unique institutional environment in China.     

Employment risk,compensation incentives,and managerial risk taking: Evidence from the mutual fund industry

We examine the influence on managerial risk taking of incentives due to employment risk and due to compensation. Our empirical investigation of the risk taking behavior of mutual fund managers indicates that managerial risk taking crucially depends on the relative importance of these incentives. When employment risk is more important than compensation incentives, fund managers with a poor midyear performance tend to decrease risk relative to leading managers to prevent potential job loss. When employment risk is low, compensation incentives become more relevant and fund managers with a poor midyear performance increase risk to catch up with the midyear winners.     

Managerial incentives,options, and cost-structure choices

This study explores the relationship between changes in managerial risk-taking incentives and adjustments of firms’ cost structures, particularly the operating leverage (fixed-to-variable cost ratio). We find managers reduce operating leverage by substituting fixed costs with variable costs, mainly in the selling, general, and administrative (SG&A) and research and development (R&D) cost components, in response to reductions in option-based compensation following the issuance of FAS 123R. Managers facing a decrease in risk-taking incentives adjust operating leverage downward because high operating leverage intensifies the downside potential of earnings. Overall, we present compelling evidence that managers adjust the cost structure of their firms in response to a reduction in risk-taking incentives.     

CEO Incentives,Relationship Lending,and the Cost of Corporate Borrowing

We investigate how lending relationships attenuate the conflict of interest between creditors and shareholders that arises from chief executive officer (CEO) compensation contracts. We find that lending relationships mitigate the influence of CEO risk‐taking incentives on loan spreads, especially for informationally opaque firms. In addition, lending relationships attenuate the impact of CEO risk‐taking incentives on maturity and collateral requirements. This article highlights the importance of bank monitoring through lending relationships to mitigate managerial risk‐shifting activities that arise from equity incentives.     

Effect of personal taxes on managers’ decisions to sell their stock

We examine the effect of personal taxes on CEOs’ decisions to sell their equity, controlling for diversification, managerial overconfidence, and other determinants. While CEOs frequently sell large amounts of their unrestricted firm equity, the tax burden associated with the sale significantly deters them from selling equity even after controlling for other determinants like diversification. We also find that both taxable institutional investors and CEOs respond to taxes in their selling of equity, although CEOs appear to be less tax-sensitive. Our findings underscore the importance of taxes in corporate and managerial decisions and they have implications for executive compensation policies.     

Managerial ownership,board monitoring and firm performance in a family‐concentrated corporate environment

Using data from Hong Kong, a market that has family‐concentrated ownership structure, we examine the relation between managerial ownership, the board of directors and firm performance. We first conduct analysis on the managerial ownership and firm performance to derive the turning points where either ‘convergence of interest’ or ‘entrenchment’ effect of managerial ownership is dominant. Based on these estimated turning points, we find that at low and high level of ownership, effective board mitigates the entrenchment effect associated with managerial ownership; at medium level of ownership, board effectiveness is less demanded. These findings suggest that managerial ownership and board monitoring are substitutes in mitigating the agency problem between managers and shareholders. We also find that effective board curbs the excessive compensation by entrenched managers to themselves at low level of managerial ownership.     

Do U.S. Insurance Firms Offer the “Wrong” Incentives to Their Executives?

We examine the relation between executive compensation and market‐implied default risk for listed insurance firms from 1992 to 2007. Shareholders are expected to encourage managerial risk sharing through equity‐based incentive compensation. We find that long‐term incentives and other share‐based plans do not affect the default risk faced by firms. However, the extensive use of stock options leads to higher future default risk for insurance firms. We argue that this is because option‐based incentives induce managerial risk‐taking behavior, which seeks to maximize managerial payoff through equity volatility. This could be detrimental to the interests of shareholders, especially during a financial crisis.