Are all CEOs above average? An empirical analysis of compensation peer groups and pay design

Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.     

Does external assurance contribute to higher quality integrated reports?

This paper contributes to the literature on internal benefits and positive capital market effects of integrated reporting by examining whether or not external assurance acts as a driver of high quality integrated reports. It answers calls for additional research on integrated reporting practice and is also timely, given the current discussions by standard-setters, regulators and other stakeholders on the need for integrated reports to be subject to some form of external verification. The research shows that an increase in the number of elements of an integrated report being subject to external assurance is associated with higher quality reporting. This is especially true when the assurance services are provided by one of the Big 4. The assurance engagements which contribute most significantly to report quality are those covering disclosures dealing broadly with social and environmental sustainability and compliance with the AccountAbility principles of materiality, inclusivity and responsiveness. In turn, if the assurance of only these aspects of an integrated report already improves report quality, there is a clear need for guidance on how the assurance process can be expanded to ensure that all material disclosures are subject to, at least, some form of verification.     

Does it pay to ‘Be Like Mike’? Aspiratonal peer firms and relative performance evaluation

Review of Accounting Studies - We examine the manner and extent to which firms evaluate performance relative to aspirational peer firms. Guided by the predictions of an agency model, we find that...     

Does it pay to pray? Religious nonprofits and funding

This study examines whether religious identity has an impact on two types of funding, donations and government grants, received by nonprofit organizations. We argue that religious nonprofits attract more donations because (1) donors feel an affinity or special tie to religious organizations and/or (2) donors regard religious organization as having good stewardship. Using 54,917 organization-year observations we find that 18% of the largest U.S. nonprofit organizations have some religious identity and that these organizations receive more donations than their non-religious counterparts. We further find that the association is more pronounced for nonprofits in more religious geographic areas, those with unrestricted donations, and organizations with better stewardship. Conversely, we find that government grants are negatively associated with religious identity, a result consistent with the separation between church and state established under U.S. law and tradition. This negative relationship, however, is mitigated for nonprofits with better stewardship. Our results should be of interest to donors and policymakers who seek to understand the impact of religion on nonprofit funding as well as the role of donor affiliation and stewardship in the fundraising process.     

Does tunneling explain the sensitivity of executive compensation to other member firms’ performance?

This study examines how executive compensation is set when a firm is a business group member. Using Korea's unique setting of family-controlled business groups, we find that a member firm's executive cash compensation is positively linked to the stock performance of other member firms as well as its own. Further analyses reveal that this positive link is consistent with the hypothesis that corporate managers are rewarded for their decision to benefit the controlling family at the expense of the firm they manage. Specifically, we find that the sensitivity of executive pay to other member firms’ performance exists only in respect to firms in which the cash flow rights of the controlling family exceed those of the subject firm. We also find that this sensitivity is strengthened if the controlling family's control–ownership disparity in the subject firm is above the sample median.     

Does program trading contribute to excess comovement of stock returns?

Daily returns of stocks with high program trading comove more with each other but less with others. This significant comovement is disconnected with market movements and news of fundamentals and becomes stronger when market uncertainty is higher. It can be explained by neither the hypotheses of gradual information diffusion and liquidity provision nor the effects of quantitative trading signals, earnings announcements and index fund trading. Its non-fundamental nature is further demonstrated by the observation of program trading stimulating return reversals. Underlying this comovement is the high persistence of program trading. Our findings support the theory of habitat investing and demonstrate program trading creates a distinct source of excess return comovement.     

Does it really pay to be green? Determinants and consequences of proactive environmental strategies

This study examines what factors affect firms’ decisions to adopt a proactive environmental strategy and whether pursuing proactive environmental strategies leads to improved financial performance. Using longitudinal data from 1990 to 2003 for the four most polluting industries in the US (Pulp & Paper, Chemical, Oil & Gas, and Metals & Mining), this research empirically models the causal relations between firms’ environmental performance and their financial resources and management capability. Our results show that positive (negative) changes in firms’ financial resources in the prior periods are followed by significant improvements (declines) in firm’s relative environmental performance in the subsequent periods. In addition, we also find that significant improvements (declines) in environmental performance in the prior periods can lead to improvements (declines) in financial performance in the subsequent periods after controlling for the impact of Granger causality. Finally, 3SLS analysis suggests that the positive association between environmental performance and financial performance is robust. Overall, our results are consistent with predictions of the resource-based view of the firm and indicate that although becoming “green” is associated with improvement in firm performance, such a strategy cannot be easily mimicked by all firms.     

Do jumps contribute to the dynamics of the equity premium?

This paper investigates whether risks associated with time-varying arrival of jumps and their effect on the dynamics of higher moments of returns are priced in the conditional mean of daily market excess returns. We find that jumps and jump dynamics are significantly related to the market equity premium. The results from our time-series approach reinforce the importance of the skewness premium found in cross-sectional studies using lower-frequency data; and offer a potential resolution to sometimes conflicting results on the intertemporal risk-return relationship. We use a general utility specification, consistent with our pricing kernel, to evaluate the relative value of alternative risk premium models in an out-of-sample portfolio performance application.     

Does it pay to be ethical? Evidence from the FTSE4Good

The empirical mean–variance evidence comparing the performance of Socially Responsible Investments (SRI) and conventional investments suggests that there is no significant difference between the two. This paper re-examines the problem in the context of Marginal Conditional Stochastic Dominance (MCSD), which can accommodate any return distribution or concave utility function. Our results provide strong evidence that there is a financial price to be paid for socially responsible investing. Indices composed of socially responsible firms are MCSD dominated by trademarked indices composed of conventional firms as well as by indices carefully matched by size and industry with the firms in the SRI indices. Zero cost portfolios created by shorting the SRI index and using the proceeds to invest in the conventional index generate higher average returns, lower variance and higher skewness than either of the two indices standing alone. They also MCSD dominate the SRI and conventional indices standing alone.     

Does it pay to invest in environmental stocks?

This paper examines market-based returns and risks of environmental vis-à-vis non environmental stocks from a portfolio selection point of view. The selection of environmental stocks is a function of greenhouse gas emissions of firms in S&P 500 for the period from 2005 to 2018. Our findings show that stocks with superior environmental performance have lower idiosyncratic risk, but higher systematic risk, while we also control for endogeneity issues. We show that that it pays to invest in environmental stocks. Robustness analysis, such as counterfactual regressions and panel VAR, confirms our main findings, though it demonstrates some of underlying complexities.     

Declining propensity to pay? A re-examination of the lifecycle theory

Our results indicate that the declining propensity to pay is a function of the changing composition of firms over time and not a declining propensity in individual firms themselves. In particular, the propensity to pay is greater than expected following the 2003 dividend tax cut. The decade a firm went public is also a major determinant of its initial payout policy. Finally, while the strength of the relation between earned/contributed capital and payout propensity declines across IPO decades, there is still a lifecycle effect — within a given IPO cohort, the likelihood of payout increases as firms age.     

Does it pay to have friends? Social ties and executive appointments in banking

We exploit a unique sample to analyze how homophily (affinity for similar others) and social ties affect career outcomes in banking. We test if these factors increase the probability that the appointee to an executive board is an outsider without previous employment at the bank compared to being an insider. Homophily based on age and gender increase the chances of the outsider appointments. Similar educational backgrounds, in contrast, reduce the chance that the appointee is an outsider. Greater social ties also increase the probability of an outside appointment. Results from a duration model show that larger age differences shorten tenure significantly, whereas gender similarities barely affect tenure. Differences in educational backgrounds affect tenure differently across the banking sectors. Maintaining more contacts to the executive board reduces tenure. We also find weak evidence that social ties are associated with reduced profitability, consistent with cronyism in banking.     

Does the Connectivity of the Belt and Road Initiative Contribute to the Economic Growth of the Belt and Road Countries?

ABSTRACT

Since the Belt and Road Initiative (BRI) has been implemented for five years, it is time to ask whether the BRI contributes to Belt and Road (BR) countries’ economic growth, and how are the five elements of connectivity implemented between China and its partner countries since the BRI was proposed. This study focuses on the development of the five elements of connectivity between China and the BR countries from 2008 to 2017 using a comprehensive connectivity index extracted from principle component analysis, and then investigating if the connectivity has contributed to the economic growth of the BR countries with quantitative analysis of the fixed effect econometrical model. It is found that Russia, South Korea, and Singapore presented the top three levels of connectivity with China with regard to the overall connectivity index, varying from 1.4 to 2.4. Madagascar and Panama have the lowest level of connectivity with China, with values of ?0.8 to ?1.1. The result of the fixed effect model shows that the connectivity of the BR countries with China contributes to their economic growth. This provides quantitative evidence that the connectivity between BR countries and China has a significant influence on the economic growth of those countries.     

Does firm heterogeneity lead to differences in relative executive compensation?

Cost heterogeneity is an important source of performance disparity among firms. This heterogeneity conditions the strategic decisions that firms make in the product market and can lead to heterogeneity in the design of managerial compensation contracts. I investigate the effect of cost heterogeneity in a strategic product market environment where firms compete à la Cournot. The paper offers new predictions on how executive compensation contracts that account for relative performance must be adjusted for cost differences.     

Does financing influence the sensitivity of cash and investment to asset tangibility?

Research shows that asset tangibility substantially impacts firms’ cash levels and investment. Using the deregulation of equity issuance in the U.S. as an exogenous shock to access to equity markets, we investigate the influence of financing on the dependence of cash and investment on asset tangibility. We show that financing dampens the sensitivity of cash and investment to asset tangibility, and promotes investment and firm growth. Our results suggest that greater access to financing allows financially constrained firms to invest in productive projects that may otherwise not be taken up. This provides evidence that public firms even in well-developed financial markets such as the U.S. benefit from financial deregulation that removes barriers to external financing, shedding light on the role of financial markets in fostering growth.     

Does prudential regulation contribute to effective measurement and management of interest rate risk? Evidence from Italian banks

This paper contributes to prior literature and to the current debate concerning recent revisions of the regulatory approach to measuring bank exposure to interest rate risk in the banking book by focusing on assessment of the appropriate amount of capital banks should set aside against this specific risk. We first discuss how banks might develop internal measurement systems to model changes in interest rates and measure their exposure to interest rate risk that are more refined and effective than are regulatory methodologies. We then develop a backtesting framework to test the consistency of methodology results with actual bank risk exposure. Using a representative sample of Italian banks between 2006 and 2013, our empirical analysis supports the need to improve the standardized shock currently enforced by the Basel Committee on Banking Supervision. It also provides useful insights for properly measuring the amount of capital to cover interest rate risk that is sufficient to ensure both financial system functioning and banking stability.     

Dare to play with fire? Managerial ability and the use of short-term debt

This study documents a positive relation between managerial ability and the use of short-term debt. This finding is robust to various specifications, including a difference-in-difference approach based on CEO turnovers. Able managers' preferences for short-term debt are amplified for firms with greater growth opportunities and are attenuated by firms' refinancing risk. Additional analyses shed light on the implications of high-ability managers' strategic use of short-term debt. Overall, the results presented in this study demonstrate that managers' innate ability plays a critical role in shaping corporate debt maturity structure.     

Does it help firms to secretly pay for stock promoters?

We examine deals between listed firms and promoters who have been secretly hired to increase their stock prices. This behavior by the secret promoter is illegal (and leads to prosecution) but the actions of the hiring firm are legal. We use data from these prosecutions to analyze the behavior and motivations of the hiring firms. We find that secret promotion leads to an initial increase in the price and trading volume of the firms on the date that the secret promotion started. Subsequently, however, we find that this increase in price is reversed when regulators (e.g. SEC or NASD) take action against these promoters for not disclosing their relationships with the hiring firms. We find that the main motives behind these relationships are to maximize the private benefits of the firm’s managers and owners through pumping the share prices and subsequently dumping their shareholdings.     

Does it pay to be different? Relative CSR and its impact on firm value

Conventional aggregation of Corporate Social Responsibility (CSR) raw scores and its interpreted impact on firm value have provided mixed evidence in the literature. We show that the value impact of CSR activities relies heavily on the industry-specific relative position of the firm. Only firms that distinguish themselves over their peers are associated with increased firm value. This finding is robust and holds for both responsible and irresponsible behaviors. Information concerns and portfolio construction can allude to a possible CSR clientele, suggesting the existence of an optimal CSR level. Our peer-effect results are robust to unobserved heterogeneity along the lines of Gormley and Matsa (2013).     

Does shareholder approval requirement of equity compensation plans matter?

This paper studies the impact of the 2003 SEC Regulation requiring shareholder approval of all equity-based executive compensation plans on executive compensation policies and practices at S&P 500 firms. Following the 2003 Regulation, firms with shareholder approved equity plans in place or those with strong performance, while not those with non-approved plans or weak performance, increase their equity compensation proposal submission activity. The quality of equity compensation proposals improves in the after-regulation period, and shareholders exhibit greater scrutiny and monitoring of executive compensation through increased voting rights. We find a decline in the equity pay component while an increase in the cash component of total executive compensation after the 2003 Regulation and also provide evidence that the 2003 Regulation contributes to this change in compensation structure.