Are Employee Selection and Incentive Contracts Complements or Substitutes?

There is a debate in the literature as to whether employee selection is a substitute or complement to incentive contracting. We argue that incentive contracts and selection can be both complements and substitutes conditional on the contracting difficulty faced by the firm. We examine these control choices in a setting where contracting difficulties arise due to the firm's choice of strategy and from the volatility created by the firm's external environment. We select a firm's commitment to organizational learning (OL) as our strategic choice variable as this provides a useful proxy for identifying settings where explicit incentive contracting is difficult. The results show that, as firms become increasingly committed to OL, incentive contracts and employee selection operate as complements. However, with a high commitment to OL and an increasing level of external volatility, contracting on performance measures will become less effective. In this context, our results indicate that there is a substitution effect toward employee selection.     

Are interim CEOs just caretakers?

Interim CEOs are often viewed as caretakers during CEO transition periods. However, the caretaker function does not fully explain the increasing trend in the use of interim CEO appointments. Recent studies suggest that firms also use the interim position to test potential CEO candidates. This paper empirically examines this argument using a hand-collected dataset of 1936 CEO successions between 1994 and 2014. We find evidence that firms consider interim positions as a testing ground for CEO candidates. Specifically, we find that candidates with uncertain managerial abilities are more likely to be initially named as interim CEOs rather than permanent CEOs. We also find that interim CEOs are more likely to be promoted to the permanent CEO position when they have better interim-period performance attributable to managerial skills. Consistent with the testing-ground option hypothesis, we find interim CEOs promoted to the permanent position result in superior long-run performance, suggesting better CEO-firm matches.     

Are Overconfident CEOs Better Innovators?

Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason: overconfidence can benefit shareholders by increasing investment in risky projects. Using options‐ and press‐based proxies for CEO overconfidence, we find that over the 1993–2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditures. However, overconfident managers achieve greater innovation only in innovative industries. Our findings suggest that overconfidence helps CEOs exploit innovative growth opportunities.     

Are MBA CEOs really more risk-averse?

This paper extends the literature on upper echelons theory that emphasizes the impact of top executives' personal characteristics on their choices by examining the relationship between CEOs holding MBAs and the riskiness of corporate policies, including investment and financial policies. To do so, data belonging to all stocks listed on the S&P 500 is collected to cover the period from 2005 to 2020 and analyzed using a panel regression model. The findings show that CEOs holding MBAs tend to undertake less risky investments compared to others, but this negative relationship is induced by unobservable heterogeneities across firms and time-varying heterogeneity across industries. Moreover, the findings failed to find any relationship between CEO-holding MBAs and financial leverage, while the relationship is negative between CEO-holding MBAs and corporate liquidity. These findings strongly deny the well-documented risk-aversion behavior of CEO-holding MBAs and support their belief in “profit-first” and self-interest” principles.     

Are CEOs incentivized to shelter good information?

Prior theoretical studies on the agency problem hold different opinions from the empirical literature on two questions: (a) Are CEOs incentivized to shelter good information? (b) Are CEOs incentivized to evenly shelter good and bad information? This paper demonstrates that CEOs with high pay‐performance incentives tend to successfully shelter good information rather than bad information. Furthermore, CEOs with high pay‐performance incentives shelter good information by using real earnings management and textual manipulation but not accrual‐based earnings management. These asymmetric information manipulation behaviors help to decrease corporate cash flow volatility as well as the jump and crash risk on the stock market.     

Are CEOs judged on their companies' social reputation?

How consequential is social reputation for a CEO's career? We find that the CEOs of those firms with greater strengths (controversies) on corporate social responsibilities (CSR) are more (less) likely to serve on external boards, and they hold more (fewer) outside directorships. CEOs lose board seats after the media expose their companies in negative environmental and social news. More nuanced analyses show that workplace diversity and supply-chain human rights are most consequential among the social and environmental dimensions of CSR. Our study demonstrates that CEOs are judged on their companies' social reputation in the director labor market. Our results also suggest that social reputation plays an important role in promoting CSR.     

How Do Ex Ante Severance Pay Contracts Fit into Optimal Executive Incentive Schemes?

We analyze a sample of over 3,600 ex ante explicit severance pay agreements in place at 808 firms and show that firms set ex ante explicit severance pay agreements as one component in managing the optimal level of equity incentives. Younger executives are more likely to receive explicit contracts and better terms. Firms with high distress risk, high takeover probability, and high return volatility are significantly more likely to enter into new or revised severance contracts. Finally, ex post payouts to managers are largely determined by the ex ante contract terms.     

Are CEOs compensated for value destroying growth in earnings?

Prior research shows that firms generating earnings growth by improving profitability create shareholder value, while firms generating earnings growth through investment destroy value. This paper examines whether compensation committees consider this while determining CEO compensation. We first confirm prior results that growth from increased profitability is perceived by markets to add value while growth from investment does not. While growth from increased profitability is positively associated with compensation, so is growth from investment. The presence of institutional ownership increases the weight on growth from increased profitability, but does not reduce the weight on growth from investment. Further, value-oriented institutional ownership increases the sensitivity of compensation growth to growth from increased profitability and reduces the sensitivity to growth from investment. Contrarily, growth-oriented institutional ownership increases the sensitivity of compensation growth to growth from investment. Our results highlight the importance of understanding the nature of earnings growth in determining executive compensation.     

Why Are CEOs Rarely Fired? Evidence from Structural Estimation

I evaluate the forced CEO turnover rate and quantify effects on shareholder value by estimating a dynamic model. The model features learning about CEO ability and costly turnover. To fit the observed forced turnover rate, the model needs the average board of directors to behave as if replacing the CEO costs shareholders at least $200 million. This cost mainly reflects CEO entrenchment rather than a real cost to shareholders. The model predicts that shareholder value would rise 3% if we eliminated this perceived turnover cost, all else equal. The model also helps explain the relation between CEO firings, tenure, and profitability.     

Are overconfident CEOs better leaders? Evidence from stakeholder commitments

We find evidence that the leadership of overconfident chief executive officers (CEOs) induces stakeholders to take actions that contribute to the leader's vision. By being intentionally overexposed to the idiosyncratic risk of their firms, overconfident CEOs exhibit a strong belief in their firms’ prospects. This belief attracts suppliers beyond the firm's observable expansionary corporate activities. Overconfident CEOs induce more supplier commitments including greater relationship-specific investment and longer relationship duration. Overconfident CEOs also induce stronger labor commitments as employees exhibit lower turnover rates and greater ownership of company stock in benefit plans.     

Are CEOs’ purchases more profitable than they appear?

Little is known about why CEOs voluntarily purchase shares of their firm other than to earn direct profits. Since CEOs are risk-averse, undiversified, and face litigation costs from trading on private information, direct profits are unlikely to be the sole motive—especially since many purchases are ultimately unprofitable. We find that CEOs who have recently purchased shares are less likely to be terminated following poor performance and that this relation varies predictably with (i) their cost of purchasing shares, (ii) the profitability of their prior purchases, and (iii) their board's access to alternative sources of information about them. We find that some CEOs voluntarily purchase shares despite the cost of foregone diversification—and, sometimes outright unprofitability—to indirectly benefit by prolonging their tenure. Our estimates imply that the average abnormal returns that CEOs earn from their purchases increases from 3% to 58% after incorporating the indirect benefit of prolonged tenure.     

Visiting monks: Are nonlocal CEOs paid more?☆

Using data on listed firms in China from 2005 to 2016, we find that nonlocal CEOs receive higher compensation than their local peers. More importantly, firms with nonlocal CEOs have lower performance and valuation than those with local CEOs. Heterogeneity analysis indicate that the higher pay of nonlocal CEOs is more prominent for firms with weak external monitoring, for state-owned enterprises, and in regions with a low supply of local talent. Additionally, firms with nonlocal CEOs exhibit lower pay-performance sensitivity and higher managerial perks. Taken together, our evidence supports geography as grounds for CEOs to extract pay premium. It highlights the importance of institutions in understanding the role of geography.     

Discussion of “Are CEOs compensated for value destroying growth in earnings?”

This discussion provides several explanations for the evidence presented in Balachandran and Mohanram (2010) that are consistent with efficient contracting. I also show that—contrary to the suggestion of the title—CEOs do not benefit from value destroying growth in earnings. Finally, I argue that there is no conclusive evidence that corporate investments destroy value.     

Are long-tenured CEOs rent seekers? Analysis of cash compensation and post disposal performance

Are typical long-tenured CEOs rent-seekers? Do compensation committees consider undiversified risk for veteran executives and design their cash pay to limit their risk exposure? Because an exit decision requires board approval, discontinued operations provide a unique setting to analyze intervention by compensation committees. Seasoned managers should require less oversight because their ability has been revealed over time. However, as CEOs advance in their careers, they are more likely to acquire power to influence board decisions. They are also more risk averse and potentially more myopic than younger CEOs because they hold a large undiversified portfolio. Lucrative labor markets for talented retired executives can incentivize long-tenured CEOs to maintain a solid reputation. I reexamine the previously reported differential sensitivity of CEO cash compensation to positive or negative-valued disposal decisions, which can be viewed as rent-seeking. I show that cash pay for veteran CEOs are shielded from the effect of both negative and positive-valued discontinued operations, suggesting that compensation committees alter their cash pay. This evidence does not support rent-seeking. I also find strong evidence that long-tenured CEOs make better exit decisions to improve future firm performance than less experienced executives.     

Do Delaware CEOs get fired?

Critics have charged that state competition in corporate law, which Delaware dominates, leads to a “race to the bottom” making management unaccountable. We argue that Delaware corporate law attracts firms with particular financial and governance characteristics. We find that Delaware attracts growth firms in industries with more takeover activity. Delaware firms have smaller boards, and their directors are paid more and serve on more boards. In addition, Delaware firms attract greater institutional ownership. We also provide a bottom-line test of the race-to-the-bottom hypothesis by examining forced CEO turnover. After controlling for differences in firm characteristics, we find that firms incorporated in Delaware are more likely to terminate CEOs. We also find that that termination decision is less sensitive to poor performance. Overall, we see no clear pattern supporting the “race to the bottom” hypothesis.     

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.     

Are female CEOs associated with lower insolvency risk? Evidence from the US property-casualty insurance industry

This paper investigates the relationship between female CEOs and insolvency risk of US property-casualty insurance companies. We show that female CEOs are associated with lower insurer insolvency propensity, higher z-score, and lower standard deviation of return on assets. These findings are robust to alternative econometric specifications to address potential endogeneity concerns and self-selection issues, including propensity score matching, the instrumental variable approach, and the difference-in-difference approach. Furthermore, we find that the impact of female CEOs on insurer insolvency risk is moderated by firm capitalization, the presence of female directors, and political conservatism of insurers' home states.     

Are more able CEOs getting more compensated? Evidence from the pay-for-performance sensitivity of equity-based incentives

This study investigates whether the managerial ability of a chief executive officer (CEO) is associated with the CEO's pay-for-performance sensitivity (PPS) of the equity-based compensation. We predict that more talented CEOs receive a higher PPS of equity incentives. Using the managerial ability score (Demerjian, Lev, & McVay, 2012) and PPS measures of options and stocks (Core & Guay, 1999), we find that a CEO's PPS of the equity-based compensation is significantly increasing in the CEO's ability. We also find that the association between managerial ability and the PPS of stock incentives is more evident for small firms. Furthermore, our results show that high ability CEOs are associated with a steeper PPS of option incentives, especially when they are not near retirement. Together, our findings suggest that firms generally incorporate the relative efficiency factor of CEO's ability in designing the CEO's equity-based compensation contracts, and thus the cross-sectional variation in the CEO's PPS is positively influenced by the CEO's ability.Data availability: Data used in this study are available from public sources identified in the study.     

Are Commercial Mortgage Defaults Affected by Tax Considerations?

We study whether tax considerations are an important determinant of commercial mortgage default. We also study whether large lenders are better informed, or better at interpreting information for lending purposes, and hence have lower foreclosure rates; whether lenders have more information on larger borrowers than smaller borrowers, and hence have lower foreclosure rates on larger loans; and whether commercial mortgage defaults are related to debt service coverage and loan-to-values, both initial and contemporaneous. The paper’s main findings are fourfold. First, holding all else equal, there is evidence that tax considerations influence investors’ decisions about when to “put” assets to lenders. The results are consistent with the argument of Constantinides (J Financ Econ 13:65–89, 1984). Second, the evidence suggests that large lenders are especially knowledgeable about commercial mortgage borrowers and commercial property markets, in that they have lower foreclosure rates than smaller lenders. Third, on the question of whether lenders have more information on larger borrowers than smaller borrowers, we find that larger loans have, on average, lower default rates than smaller loans. Fourth, the findings suggest that lower default rates are associated with higher debt service coverage ratios, both initial and contemporaneous.