Does stardom affect the informativeness of a CEO's insider trades?

This study examines whether the celebrity or star status of a chief executive officer (CEO) affects the informativeness of his insider trades. Using three different measures to identify star CEOs in a sample of S&P 1500 firms, we find that trades of non‐star CEOs predict future abnormal returns and earnings innovations and that trades of star CEOs do not. The predictive power of non‐star CEO trades is mostly attributable to opportunistic trades, not routine trades. We also find evidence suggesting that the abnormal returns associated with non‐star CEO insider trades are due to the lower visibility and consequently less scrutiny of non‐star CEOs compared with star CEOs.     

The Roles of Corporate Governance in Bank Failures during the Recent Financial Crisis

We analyze the roles of bank ownership, management, and compensation structures in bank failures during the recent financial crisis. Our results suggest that failures are strongly influenced by ownership structure: high shareholdings of lower‐level management and non‐chief executive officer (non‐CEO) higher‐level management increase failure risk significantly. In contrast, shareholdings of banks’ CEOs do not have a direct impact on bank failure. These findings suggest that high stakes in the bank induce non‐CEO managers to take high risks due to moral hazard incentives, which may result in bank failure. We identify tail risk in noninterest income as a primary risk‐taking channel of lower‐level managers.     

CEO Compensation and Firm Performance: an Empirical Investigation of UK Panel Data

This paper examines the link between CEO pay and performance employing a unique, hand‐collected panel data set of 390 UK non‐financial firms from the FTSE All Share Index for the period 1999–2005. We include both cash (salary and bonus) and equity‐based (stock options and long‐term incentive plans) components of CEO compensation, and CEO wealth based on share holdings, stock option and stock awards holdings in our analysis. In addition, we control for a comprehensive set of corporate governance variables. The empirical results show that in comparison to the previous findings for US CEOs, pay‐performance elasticity for UK CEOs seems to be lower; pay‐performance elasticity for UK CEOs is 0.075 (0.095) for cash compensation (total direct compensation), indicating that a ten percentage increase in shareholder return corresponds to an increase of 0.75% (0.95%) in cash (total direct) compensation. We also find that both the median share holdings and stock‐based pay‐performance sensitivity are lower for UK CEOs when we compare our findings with the previous findings for US CEOs. Thus, our results suggest that corporate governance reports in the UK, such as the Greenbury Report (1995) that proposed CEO compensation be more closely linked to performance, have not been totally effective. Our findings also indicate that institutional ownership has a positive and significant influence on CEO pay‐performance sensitivity of option grants. Finally, we find that longer CEO tenure is associated with lower pay‐performance sensitivity of option grants suggesting the entrenchment effect of CEO tenure.     

Components of CEO Remuneration and Non‐GAAP Disclosure

This paper provides evidence of the effect of chief executive officer (CEO) remuneration on decisions to disclose voluntary non‐generally accepted accounting principles (non‐GAAP) financial measures. We investigate profit announcements that focus on the most emphasised part, which includes mandatorily identified information (results for the announcement to the market) and the least emphasised part, which incorporates other sections. By reading the profit announcements and manually collecting non‐GAAP financial measures (NGFM) data, there is no reliance on keyword search strings and as such we uncover the pervasiveness of the use of NGFM. Results show that the base component of CEOs’ remuneration plays a significant role in reporting NGFM in the most emphasised part of the profit announcement. Conversely, all three (base, short‐term and long‐term incentives) components of the remuneration package have a significant relationship with the reporting decisions in the least emphasised part of the statement. We find that, depending on the regulatory imposition and the emphasis assigned to the section of the profit announcement, the motive for voluntary disclosure of NGFM can be explained as altruistic (informative) or opportunistic (misleading). We contribute evidence on ‘pay–action’ rather than ‘pay–performance’ by incorporating all three components simultaneously into the framework to maintain the assumption of correspondence and internal consistency among those components.     

Does Say‐on‐Pay Matter? Evidence from Say‐on‐Pay Proposals in the United States

We investigate the effect of say‐on‐pay (SOP) proposals on changes in executive and director compensation. Relative to non‐SOP firms, SOP firms’ total compensation to CEOs does not significantly change after the proposal. However, the mix of compensation does change—companies move away from using cash compensation toward more incentive compensation, offsetting the reduction in bonus. Further, the mix of compensation of non‐CEO executives changes similarly to that of CEOs. Compensation to directors of SOP firms increases less than non‐SOP firms. Firms whose CEOs are well compensated, especially with cash‐based compensation, are most likely to receive a proposal.     

Why Do Canadian Firms Cross‐list? The Flip Side of the Issue

We investigate the relation between managerial incentives and the decision to cross‐list by comparing Canadian firms cross‐listed on US stock exchanges to industry‐ and size‐matched control firms. After controlling for firm and ownership structure characteristics, we find a positive association between substantial holdings of vested options held by CEOs prior to cross‐listing and the decision to cross‐list. Further, firms managed by CEOs with substantial holdings of vested options exhibit positive announcement returns and negative post‐announcement long‐run returns. CEOs of cross‐listed firms seem to take advantage of the aforementioned market behaviour, because they abnormally exercise vested options and sell the proceeds during the year of listing only when their firms underperform during the subsequent year. In addition, there is a positive relation between substantial holdings of vested options and discretionary accruals during the year of listing, consistent with the view that CEOs manage earnings to keep stock prices at high levels. Overall, these results have significant implications for the cross‐listing literature, suggesting an association between cross‐listing and CEO incentives to maximize CEO private benefits.     

Cash holdings in family firms: CEO identity and implications for firm value

We investigate the cash holdings policy of family firms and examine potential value implications. Family firms hold more cash than other firms, with an average difference of 2.3% of total assets. This result is driven by firms managed by heir CEOs. While the cash holdings policy of first‐generation family firms is more sensitive to firm risk, consistent with founders’ increased risk aversion, that of later‐generation firms is more sensitive to information asymmetry and agency conflicts. Heir CEOs’ cash policies destroy value, as the marginal value of an additional Euro suffers from a 38.3‐cent discount, on average, relative to non‐family firms.     

NOT REPORTING A PROFIT: CONSTRUCTING A NON‐PROFIT ORGANISATION

Public sector reformers advocate contracting‐out as a means of improving cost‐effectiveness. In the health sector, market‐based contracts with for‐profit organisations can reduce equity of access and divert public funds to private gain. Such issues have prompted policy makers to seek alternative contracting strategies. This paper examines a primary health care policy whereby government contracts with private non‐profit organisations to increase efficiency and meet World Health Organisation ideals. The study found that the policy's implementation has not achieved these aims when for‐profit providers masquerade as non‐profit organisations. The implication is that governments may find it more effective to manage for structural diversity than mandate homogenisation.     

Equity‐Based Incentives,Risk Aversion,and Merger‐Related Risk‐Taking Behavior

We find that post‐merger equity risk is negatively related to the sensitivity of CEO wealth to stock return volatility (vega), but is concentrated in CEOs with high proportions of options and options that are more in‐the‐money. The probability of industrial diversification also increases in vega. Additional tests show that the decline in post‐merger equity risk results in a significant decrease in shareholder wealth. This decrease is concentrated among firms with CEOs having the highest delta and the highest delta and vega. Our results suggest that the increased convexity provided by option‐based compensation does not necessarily increase risk‐taking behavior by CEOs.     

CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on takeovers. Using retirement age as a proxy for CEOs’ private merger costs, we find strong evidence that target CEOs’ preferences affect merger activity. The likelihood of receiving a successful takeover bid is sharply higher when target CEOs are close to age 65. Takeover premiums and target announcement returns are similar for retirement‐age and younger CEOs, implying that retirement‐age CEOs increase firm sales without sacrificing premiums. Better corporate governance is associated with more acquisitions of firms led by young CEOs, and with a smaller increase in deals at retirement age.     

Performance Incentives within Firms: The Effect of Managerial Responsibility

We show that top management incentives vary by responsibility. For oversight executives, pay‐performance incentives are $1.22 per thousand dollar increase in shareholder wealth higher than for divisional executives. For CEOs, incentives are $5.65 higher than for divisional executives. Incentives for the median top management team are substantial at $32.32. CEOs account for 42 to 58 percent of aggregate team incentives. For divisional executives, the pay–divisional performance sensitivity is positive and increasing in the precision of divisional performance and the pay–firm performance sensitivity is decreasing in the precision of divisional performance. These results support principal–agent models with multiple signals of managerial effort.     

The Use of Performance‐based Remuneration: High versus Low‐growth Firms

This study analyses the CEO remuneration structure and level for 100 Australian‐listed entities. Consistent with expectations, it finds that high‐growth firms pay their CEOs a greater proportion of performance‐based pay, when equity‐based rewards only are considered. High‐growth firms also place greater reliance on market and/or non‐financial performance standards for the award of performance‐based pay. The extent to which performance‐based remuneration is used as a component of CEO pay is positively associated with firm size and growth options. Other potential determinants of performance‐based pay, such as financial performance, are not significantly associated with the use of performance‐based remuneration.     

CEO incentive compensation and stock price momentum

We document strong evidence that CEO incentive compensation can predict the significance of stock price momentum through discretionary accrual and real activities manipulation. The profit of momentum strategy increases with CEO pay-for-performance incentive, but decreases with CEO risk-taking incentive. It also evaluates the effects of information uncertainty on such relationship. The evidence is more significant for firms with older and longer tenured CEOs and firms with more informed traders. The relationship between the profit of momentum strategy and CEO pay-for-performance incentive is stronger among CEOs without the risk-taking incentive. Our results are robust for different sub-samples based on before and after Reg FD and Sarbanes–Oxley Act, even after controlling for the potential endogeneity. Further, our findings are consistent with the information diffusion explanation of momentum and the agency theory that incentivised CEOs tend to manipulate information by smoothing good news, concealing mildly bad news and accelerating the disclosure of extremely bad news.     

The Internal Governance of Firms

We develop a model of internal governance where the self‐serving actions of top management are limited by the potential reaction of subordinates. Internal governance can mitigate agency problems and ensure that firms have substantial value, even with little or no external governance by investors. External governance, even if crude and uninformed, can complement internal governance and improve efficiency. This leads to a theory of investment and dividend policy, in which dividends are paid by self‐interested CEOs to maintain a balance between internal and external control.     

Letters to the shareholders: A content analysis comparison of letters written by CEOs in the United States and Japan

Previous studies suggest that letters to the shareholders are widely used in investors' decision-making processes. Letters to the shareholders, however, are unaudited and usually not subject to regulation. Hence, CEOs may use them strategically to manage the impressions shareholders have of the company. This paper focuses on letters to the shareholders from Japanese and U.S. companies. The research examines whether U.S. and Japanese CEOs explain the causes of good and bad news in different ways. The findings point to a number of interesting differences between the U.S. and Japanese letters to the shareholders, including: (1) that U.S. CEOs in particular emphasize good news; (2) that Japanese and U.S. letters are statistically indistinguishable with respect to the extent to which CEOs claim responsibility for good news; and (3) that while CEOs in general ascribe bad news to causes beyond their control, this tendency is particularly strong in Japanese letters. The implications of the study for both investors and regulators are discussed.     

CEO Pay and Corporate Governance in the U.S.: Perceptions,Facts, and Challenges

This article brings a broad range of statistical studies and evidence to bear on three common perceptions about the CEO compensation and governance of U.S. public companies: (1) CEOs are overpaid and their pay keeps increasing; (2) CEOs are not paid for their performance; and (3) boards do not penalize CEOs for poor performance. While average CEO pay increased substantially during the 1990s, it has declined since then— by more than 30%—from peak levels that were reached around 2000. Moreover, when viewed relative to corporate net income or profits, CEO pay levels at S&P 500 companies are the lowest they've been in the last 20 years. And the ratio of large‐company CEO pay to firm market value is roughly similar to its level in the late 1970s, and lower than the levels that prevailed before the 1960s. What's more, in studies that begin with the late '70s, private company executives have seen their pay increase by at least as much as public companies. And when set against the compensation of other highly paid groups, today's levels of CEO pay, although somewhat above their long‐term historical average, are about the same as their average levels in the early 1990s. At the same time, the pay of U.S. CEOs appears to be reasonably highly correlated with corporate performance. As evidence, the author cites a 2010 study reporting that, over the period 1992 to 2005, companies with CEOs in the top quintile (top 20%) of realized pay in any given year had generated stock returns that were 60% higher than the average companies in their industries over the previous three years. Conversely, companies with CEOs in the bottom quintile of realized pay underperformed their industries by almost 20% in the previous three years. And along with lower pay, the CEOs of poorly performing companies in the 2000s faced a significant increase in the likelihood of dismissal by their own boards. When viewed together, these findings suggest that corporate boards have done a reasonably good job of overseeing CEO pay, and that factors such as technological advances and increased scale have played meaningful roles in driving the pay of both CEOs and others with top incomes—people who are assumed to have comparable skills, experience, and opportunities. If one wants to use increases in CEO pay as evidence of managerial power or “board capture,” one also has to explain why the other professional groups have experienced similar, or even higher, growth in pay. A more straightforward interpretation of the evidence reviewed in this article is that the market for talent has driven a meaningful portion of the increase in pay at the top. Consistent with this conclusion, top executive pay policies at roughly 97% of S&P 500 and Russell 3000 companies received majority shareholder support in the Dodd‐Frank mandated “Say‐on‐Pay” votes in 2011 and 2012, the first two years the measure was in force.     

The Effect of CEO Extraversion on Analyst Forecasts: Stereotypes and Similarity Bias

In an experiment with professional analysts, we study their reliance on CEO personality information when producing financial forecasts. Drawing on social cognition research, we suggest analysts apply a stereotyping heuristic, believing that extraverted CEOs are more successful. The between‐subjects results with CEO extraversion as treatment variable confirm that analysts issue more favorable forecasts (earnings per share, long‐term earnings growth, and target price) for firms led by extraverted CEOs. Increased forecast uncertainty leads to even stronger stereotyping. Additionally, personality similarity between analysts and CEOs has a large effect on financial forecasts. Analysts issue more positive forecasts for CEOs similar to themselves.     

CEO Overconfidence and Earnings Management During Shifting Regulatory Regimes

This study examines the relationship of CEO overconfidence with accrual‐based earnings management, real activities‐based earnings management, and targeting to meet or just beat analyst forecasts. Following, we measure “overconfidence” based on the CEO's tendency to hold in‐the‐money stock options, as rational expected utility maximizers should exercise early to avoid overexposure to company idiosyncratic risks. The results show that before the Sarbanes Oxley Act of 2002 (SOX), companies of overconfident CEOs were more likely than other CEOs to engage in managing earnings through accelerating the timing of cash flow from operations and achieving analyst forecast benchmarks. After SOX, we find that overconfident CEOs are more likely to have income‐increasing discretionary accruals. They remain more likely to engage in real activities management through abnormally high cash flows, and also have abnormally low discretionary expenses. These results are consistent with overconfident CEOs feeling less constrained by SOX, and suggest that this individual characteristic works against regulators’ attempts to constrain earnings management by corporate executives. In contrast, we find that the tendency of overconfident CEOs to manage to targets decreases after SOX, perhaps due to changes in investor behavior in the new regulatory environment.     

The dark side of CEO ability: CEO general managerial skills and cost of equity capital

CEOs with substantial general managerial ability (generalist CEOs) possess a substantial share of organization (human) capital and have different risk-taking incentives than do their counterpart specialist CEOs. Using an index increasing in CEO general managerial skills as a proxy for general managerial ability, we find that investors require higher returns from firms featuring CEOs who have profuse general managerial ability. Furthermore, expected returns are significantly increasing with CEO general managerial ability in firms with high organization capital, that belong to M&A-intensive industries and that have complex operations, high agency problems and high anti-takeover provisions. These findings are consistent with arguments that organization (human) capital has significant expected return implications and that CEOs with higher general managerial skills may lead to higher agency problems, feature different risk-taking incentives and be more costly to retain in times of need.     

CEO internal experience and voluntary disclosure quality: Evidence from management forecasts

Internally‐promoted CEOs should have a deep understanding of their firm's products, supply chain, operations, business climate, corporate culture, and how to navigate among employees to get the information they need. Thus, we argue that internally‐promoted CEOs are likely to produce higher quality disclosure than outsider CEOs. Using a sample of US firms from the S&P1500 index from 2001 to 2011, we hand‐collect whether a CEO is hired from inside the firm and, if so, the number of years they worked at the firm before becoming CEO. We then examine whether managers with more internal experience issue higher quality disclosures and offer three main findings. First, CEOs with more internal experience are more likely to issue voluntary earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Second, CEOs with more internal experience issue more accurate earnings forecasts than those managers with less internal experience as well as those managers hired from outside the firm. Finally, investors react more strongly to forecasts issued by insider CEOs than to those issued by outsider CEOs. In additional analysis, we find no evidence that these results extend to mandatory reporting quality (i.e., accruals quality, restatements, or internal control weaknesses), perhaps because mandatory disclosure is subjected to heavy oversight by the board of directors, auditors, and regulators. Overall, our findings suggest that when managers have work experience with the firm prior to becoming the CEO, the firm's voluntary disclosure is of higher quality.