CEO pay ratios and financial reporting quality

We address the Dodd Frank Act controversy about the usefulness of the CEO pay ratio to investors by investigating the relationship between that ratio and financial quality, measured by the level of discretionary accruals and the likelihood of restating previously issued financial statements. We test two conflicting explanations of pay disparity: (1) competition for CEO talent and (2) managerial rent-seeking. Though we find that the unconditional relationship between the CEO pay ratio and financial quality is negative, the sign of this relationship is sensitive to CEO power and competence. Our findings suggest that the pay ratio does shed light on the fairness of compensation structures.     

CEO power,M&A decisions,and market reactions

In this study we examine the relationship between CEO power, corresponding acquisition activities and market reactions to mergers and acquisitions (M&A) announcements with a Canadian M&A dataset (1997–2005). We use CEO excess pay as a proxy for CEO power. Our empirical results show that the market reactions to M&A announcements are not related to CEO power. It implies that powerful CEOs do not necessarily make value destroying acquisitions. Our results further show that CEO power levels are significantly higher for acquiring firms compared to the CEOs of non-acquiring firms. In other words, CEOs with more relative power make more acquisitions. Such acquisitions will increase the size of the firm and will allow CEOs to demand a higher compensation level for managing larger asset pools and to derive higher performance incentives that are also generally tied to firm size.     

CEO compensation and incentives: Evidence from M&A bonuses

We investigate CEO compensation for completing M&A deals. We find that CEOs who have more power to influence board decisions receive significantly larger bonuses. We also find a positive relation between bonus compensation and measures of effort, but not between bonus compensation and deal performance. CEOs with more power also tend to engage in larger deals relative to the size of their own firms, and the market responds more negatively to their acquisition announcements. Our evidence is consistent with the argument that managerial power is the primary driver of M&A bonuses.     

The differential CEO dominance-compensation and corporate governance-compensation relations: Pre- and post-SOX

We examine the relationship between corporate governance (as measured by traditional corporate governance variables and a new measure of corporate governance, called CEO dominance) and executive compensation, pre- and post-SOX. We conceptualize CEO dominance as a measure of a CEO's power and define it as the difference between CEO pay and the next highest executive's pay divided by the CEO's pay. We argue that for traditional corporate governance variables, the inverse governance-compensation relation that exists pre-SOX will improve post-SOX. On the other hand, we expect a strong and positive CEO dominance-compensation relation to exist both pre- and post-SOX. Consistent with expectations, our results indicate that SOX has changed the relationship between CEO duality and compensation relation, but it has not changed the CEO dominance-compensation relation. This suggests that SOX regulatory reforms do not limit the ability of CEO power to obstruct traditional corporate governance mechanisms in extracting compensation-related rents.     

Excessive managerial entrenchment,corporate governance,and firm performance

This paper investigates the differential impact of positive and negative excessive managerial entrenchment on the CEO turnover-performance sensitivity, CEO compensation, and firm performance. We measure the degree of managerial entrenchment using the E-index introduced by Bebchuk et al. (2009). Our findings suggest that an increase in excess CEO entrenchment reduces the likelihood of CEO turnover due to poor performance. We also show a positive association between excessive entrenchment and CEO compensation as managers gain more power and authority when they are entrenched. On the other hand, excess CEO entrenchment has an inverse correlation with firm performance and firm value. Overall, we propose that excessive managerial entrenchment has a converse impact on board monitoring and shareholders’ welfare.     

CEO Compensation and Board Structure Revisited

Chhaochharia and Grinstein estimate that CEO pay decreases 17% more in firms that were not compliant with the recent NYSE/Nasdaq board independence requirement than in firms that were compliant. We document that 74% of this magnitude is attributable to two outliers of 865 sample firms. In addition, we find that the compensation committee independence requirement increases CEO total pay, particularly in the presence of effective shareholder monitoring. Our evidence casts doubt on the effectiveness of independent directors in constraining CEO pay as suggested by the managerial power hypothesis.     

Deviations from optimal CEO ownership and firm value

The transaction cost theory of managerial ownership and firm value predicts that deviations from optimal managerial ownership reduce firm value. This paper empirically tests the transaction cost theory by studying the relation between deviations on either side of optimal CEO ownership and firm value. We find that both above-optimal and below-optimal deviations reduce firm value. We find that a change in CEO ownership is associated with a higher (lower) abnormal return if it moves the ownership towards (away from) the optimal level. These findings are consistent with the transaction cost theory of managerial ownership and firm value.     

Entrenchment or incentive? CEO employment contracts and acquisition decisions

A long-standing controversy is whether CEO employment contracts insulate inferior managers from discipline leading to shareholder wealth destruction, or whether contracts alleviate managerial risk aversion and encourage value-enhancing decisions. Using a unique dataset on S&P 500 CEO employment contracts during 1993–2005, I find that acquirers with a CEO contract obtain better announcement returns, pay lower premiums for their targets, garner superior long-run post-acquisition operating performance, and undertake riskier deals than acquirers without a contract. Further investigation of individual contract provisions reveals substantial heterogeneity. Specifically, the fixed term rather than at will contract, longer contract duration, long-term equity incentives, accelerated stock and option vesting provisions in severance arrangement, and more refined definitions of just cause (good reason) for CEO termination (resignation) alleviate managerial risk aversion, reduce contracting ambiguity, and motivate value-creating decisions.     

Bidder CEO and Other Executive Compensation in UK M&As

This paper investigates the impact of M&As on bidder (CEO and other) executive compensation employing a unique sample of 100 completed bids in the UK over the 1998–2001 period. Our findings indicate that less independent and larger boards award CEOs significantly higher bonuses and salary following M&A completion both for the full sample and for the UK and US sub‐samples. UK CEOs and executives are rewarded more for the effort exerted in accomplishing intra ‐ industry or large mergers than for diversifying or small mergers and their cash pay is unaffected by other measures of their managerial skill or performance. US bidders are rewarded at higher levels than their UK counterparts and their remuneration is related only to measures of CEO dominance over the board of directors. Overall our findings offer support for the managerial power rather than the agency theory perspective on managerial compensation.     

A path analysis investigation of the relationships between CEO pay ratios and firm performance mediated by employee satisfaction

We posit that information about CEO pay ratios is important to investors because employees' perceived fairness of their firm’s CEO pay ratio has consequences for firm performance. We use path analysis to examine the association between firm performance and (1) the predicted CEO pay ratio as determined by economic factors (the fair component of CEO pay ratio) and (2) the predicted CEO pay ratio as determined by non-economic factors (the unfair component of CEO pay ratio). We test for the existence and relative importance of direct and indirect paths using two measures of employee satisfaction and two measures of firm performance. We find that pay equity, a larger CEO pay ratio driven by economic factors, is associated with employee contributions to better firm performance. Conversely, we show that pay inequity, a larger CEO pay ratio driven by non-economic factors, is associated with employees' contributions to poorer firm performance. Consistent with the view that managerial entrenchment may amplify the negative effects of the CEO pay ratio, we find that the negative indirect path between pay inequity and firm performance, mediated by employee satisfaction, is more pronounced in firms with entrenched CEOs. Our findings contribute to the accounting compensation literature because they are consistent with CEO pay ratio information having economic consequences.     

A Remedy for the Executive Pay Problem: The Case for "Compensation Discussion and Analysis"

After acknowledging the strengths of Bebchuk and Fried's case for managerial power in setting executive pay, this article expresses three major reservations:
First, concerns about the apparent lack of pay for performance do not alone provide a sufficient framework for understanding the controversy over CEO pay or devising a remedy. In fact, such concerns may well take a backseat to popular unrest about the levels of pay, a problem that Bebchuk and Fried largely ignore.
Second, many of the compensation practices identified as "smoking guns" of managerial power, such as the failure to index stock and options and the use of "stealth compensation," may have benign explanations. For example, since the vast majority of employee stock options are awarded to people well below the executive ranks, the absence of indexing may help to preserve a simple, visible score-card (however flawed) for motivating all levels of the organization. And the use of stealth pay may be justified as a means of preventing public scrutiny from distorting private decisions.
Third, even if corporate governance needs improvement, the best remedy may be not a wholesale expansion of shareholder power, but rather a tailored series of measures designed to bolster the defacto independence of the compensation committee. Most important, the SEC should require proxy disclosure of a "Compensation Discussion and Analysis" statement, signed by all the members of the compensation committee, that summarizes and justifies all compensation elements for all senior executives. The resulting process "ownership" and reputation-staking will strengthen the committee's hand against managerial pressure. In addition, serious thought should be given to a shareholder approval vote on the CD&A following the new U.K. practice.     

CEO gender and managerial entrenchment

This paper investigates the effect of gender on managerial authority and control over firms. The study examines S&P 1500 firms for the period of 1999–2014. Our findings suggest that accounting performance, firm value, CEO age, firm age, and board size reduce the likelihood of appointing female managers. On the other hand, the appointment of female CEOs is directly associated with the percentage of female directors, board independence, and beta. The study confirms the notion that female CEO appointments are generally associated with firms facing adverse conditions, and shows that female CEOs are more entrenched as compared to male CEOs. We find that the presence of female CEO decreases the turnover-performance sensitivity, increases the E-index, and inflates CEO compensation. Our research suggests that the level of female CEOs’ entrenchment provides them with greater job security, higher level of control, and inflated pay that compensate the risk of accepting the appointment in a high risk and poor performing firm.     

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 tournament incentives and corporate debt contracting

This study examines the relation between CEO tournament incentives, proxied by the difference between CEO pay and the median pay of the senior executives of a given firm, and corporate debt contracting. We find negative relations between CEO pay gap and the cost of debt and default risk, and a positive relation between CEO pay gap and debt maturity. Further analysis indicates that the results are stronger for firms with near-retirement CEOs, which are more likely to run CEO tournaments. Our evidence suggests that creditors view tournament incentives favorably and are willing to provide better debt terms.     

CEO ownership, external governance, and risk-taking

This paper shows the relation between CEO ownership and firm valuation hinges critically on the strength of external governance (EG). The relation is hump-shaped when EG is weak, but is insignificant when EG is strong. The results imply that CEO ownership and EG are substitutes for mitigating agency problems when ownership is low. However, very high levels of share ownership can reduce firm value by entrenching the CEO and discouraging him from taking risk, unless mitigated by strong EG. We identify channels through which CEO ownership affects firm value by examining R&D, which is discretionary and risky. We find CEO ownership similarly exhibits a hump-shaped relation with R&D when EG is weak, but no relation when EG is strong. Our results are robust to endogeneity issues concerning CEO ownership and EG.     

Corporate governance, compensation consultants, and CEO pay levels

This study investigates the relation between corporate governance and CEO pay levels and the extent to which the higher pay found in firms using compensation consultants is related to governance differences. Using proxy statement disclosures from 2,110 companies, we find that CEO pay is higher in firms with weaker governance and that firms with weaker governance are more likely to use compensation consultants. CEO pay remains higher in clients of consulting firms even after controlling for economic determinants of compensation. However, when consultant users and non-users are matched on both economic and governance characteristics, differences in pay levels are not statistically significant, indicating that governance differences explain much of the higher pay in clients of compensation consultants. We find no support for claims that CEO pay is higher in potentially “conflicted” consultants that also offer additional non-compensation-related services.     

CEO inside debt and internal capital market efficiency

Agency theory argues that managerial equity-based incentives are more effective when firm solvency is likely while debt-based incentives are more effective when firms face a greater likelihood of bankruptcy. We examine the relation between chief executive officers' (CEOs') inside debt holdings and the internal capital market allocation of multi-segment firms. We find that CEO inside debt holdings are associated with conservative capital allocation to firm segments, with the result driven by financially distressed firms. Further analysis indicates that although CEO inside debt, on average, is negatively related to firm value, the relation is positive for financially distressed firms. Our evidence indicates that inside debt holdings align the interests of managers and external creditors, inducing managers to pursue conservative capital allocation strategies that appear to be optimal for firms facing insolvency.     

CEO power and annual report reading difficulty

We examine the impact of CEO power on reading difficulty of corporate annual reports. We find that CEO power is positively related to reading difficulty, implying that annual reports of corporations with powerful CEOs are difficult to read and understand. More importantly, we find that the relation between CEO power and reading difficulty is moderated by earnings performance or corporate governance. Additional findings suggest that this relation becomes stronger for firms with lower financial reporting quality or for CEOs with shorter tenure. Our study not only joins the debate on the consequences of powerful CEOs but also uncovers several factors that moderate the relation between CEO power and annual report reading difficulty.     

Antitakeover provisions and CEO monetary benefits: Revisiting the E-index

We analyze and group antitakeover provisions as they relate to CEO’s monetary benefits. We specifically focus on the determinants of the six E-index provisions that were proposed by Bebchuk et al. (2009) to conversely affect firm value. The six provisions are split into two indices: those that provide managers with a monetary benefit if a takeover was successful (MB provisions) and those that do not (TP provisions). Results indicate that CEOs with a role duality use their power to influence the adoption of MB provisions and resist the adoption of TP provisions. Moreover, in the presence of CEO duality, the relationship between MB provisions and firm value worsens. On the other hand, the relationship between TP provisions and firm value is unaffected by the presence of CEO duality. This suggests that CEOs having a role duality do not feel the need to work in the shareholders’ best interest when entrenched with MB provisions. Our findings suggest that studying all the provisions of the E-index as a whole can be misleading in some cases.     

AIA submission: CEO overconfidence and the incidence of financial restatement

The role of the Chief Executive Officer (hereafter, CEO) in financial reporting is almost universally assumed to be significant (Carcello, Neal, Palmrose & Scholz, 2011; Cohen, Krishnamoorthy, & Wright, 2002; Connelly, 2005; Paredes, 2004). While academics and regulators agree that the CEO can have a large impact on financial reporting decisions, there is very little research on how individual CEO characteristics actually influence the financial reporting process. This paper examines the impact of one such CEO characteristic – CEO overconfidence – on the incidence of financial restatement. We utilize a matched-pairs research design consisting of 75 restatement firms (obtained through the GAO restatement sample) and a set of 75 non-restatement control firms. Using an options-based measure of CEO overconfidence developed by Malmendier and Tate (2008), we document a statistically significant positive relation between CEO overconfidence and financial statement restatement.