CEO DIRECTORS,EXECUTIVE INCENTIVES,AND CORPORATE STRATEGIC INITIATIVES

I study how directors who are chief executive officers (CEOs) of other firms affect board effectiveness. I find that CEOs are paid more and their compensation is less sensitive to firm performance when other CEOs serve as directors. This is not an employment risk premium because CEO directors are not associated with higher turnover‐performance sensitivity. Also, CEO directors have no effect on corporate innovation but are associated with higher acquisition returns, especially for complex deals. My results suggest that the advisory benefits of CEO directors must be balanced against the distortions in executive incentives associated with their board service.     

Equity grants to target CEOs during deal negotiations

I investigate the determinants and consequences of granting equity to the target's Chief Executive Officer (CEO) during deal negotiations. These negotiation grants likely reflect information about the acquisition, benefit from the deal premium, and provide more timely bargaining incentives. I find that CEOs are more likely to receive equity during negotiations when they negotiate for the target, particularly when the target has more bargaining power. This suggests that boards use equity to enhance bargaining incentives for CEOs with the most influence over deal price. I find limited evidence that negotiation grants are used as compensation and no evidence that they have a material adverse effect on shareholders.     

The Effect of Overconfidence on the Sensitivity of CEO Wealth to Equity Risk

Recent theory predicts that shareholders provide overconfident managers with weaker risk-taking incentives. We test this prediction using a sample of bank CEOs over the period 1993–2002. We classify a CEO as overconfident if he is more often characterized as confident than as cautious in press. Consistent with theory, we find that the sensitivity of CEO wealth to equity risk is lower for overconfident CEOs. Our finding suggests that shareholders know whether a CEO is overconfident, and take that into account when designing the compensation contract for the CEO.     

Good for managers,bad for society? Causal evidence on the association between risk-taking incentives and corporate social responsibility

Using FAS 123R as an exogenous shock to stock options, I provide evidence that equity-based risk-taking incentives discourage corporate social responsibility (CSR). This finding suggests that compensation incentives can motivate managers not to pursue CSR strategies because CSR reduces firms’ risk and provides insurance-like benefits. Firms with a greater demand for CSR's risk reduction are more sensitive to changes in risk-taking incentives. I triangulate my results by confirming that CSR weaknesses are positively related to subsequent stock return volatility. Overall, using a robust empirical design, I find that risk-taking incentives are a determinant of firms’ CSR.     

Respondable risk and incentives for CEOs: The role of information-collection and decision-making

This paper examines the incentive provision when the agent can respond to risk by exerting effort to collect information about the underlying state and making corresponding decisions. Such effort is shown to be more valuable in a riskier environment and incentives can increase with “respondable” risk. The relation between incentives and risk is more positive when the agent's effort is more effective in collecting information or in acting upon it. Using data on chief executive officers (CEOs), I find that incentives for CEOs increase with industry-wide risk, a measure of respondable risk. The positive relation diminishes when the CEO is less able to collect information or is less effective in acting upon it.     

Bank Risk Taking at the Onset of the Current Banking Crisis

We analyze bank governance, share ownership, CEO compensation, and bank risk taking in the period leading to the current banking crisis. Using a sample of large U.S. bank holding companies (BHCs), we find that BHCs with greater managerial control, achieved through various corporate governance mechanisms, take less risk. BHCs that pay CEOs high base salaries also take less risk, while BHCs that grant CEOs more in stock options or that pay CEOs higher bonuses take more risk. The evidence is generally consistent with BHC managers exhibiting greater risk aversion than outside shareholders, but with several factors affecting managers’ risk‐taking incentives.     

CEO age and the riskiness of corporate policies

Prior theoretical work generates conflicting predictions with respect to how CEO age impacts risk-taking behavior. Consistent with the prediction that risk-taking behavior decreases as CEOs become older, I document a negative relation between CEO age and stock return volatility. Further analyses reveal that older CEOs reduce firm risk through less risky investment policies. Specifically, older CEOs invest less in research and development, make more diversifying acquisitions, manage firms with more diversified operations, and maintain lower operating leverage. Further, firm risk and the riskiness of corporate policies are lowest when both the CEO and the next most influential executive are older and highest when both of these managers are younger. Although older CEOs prefer less risky investment policies, I document results suggesting that CEO and firm risk preferences tend to be aligned. Lastly, I find that a trading strategy that goes long in a portfolio of stocks consisting of firms managed by younger CEOs and short in a portfolio of stocks comprised of firms led by older CEOs would generate positive risk-adjusted returns. Overall, my results imply that CEO age can have a significant impact on risk-taking behavior and firm performance.     

Executive stock options,differential risk-taking incentives,and firm value

The sensitivity of stock options' payoff to return volatility, or vega, provides risk-averse CEOs with an incentive to increase their firms' risk more by increasing systematic rather than idiosyncratic risk. This effect manifests because any increase in the firm's systematic risk can be hedged by a CEO who can trade the market portfolio. Consistent with this prediction, we find that vega gives CEOs incentives to increase their firms' total risk by increasing systematic risk but not idiosyncratic risk. Collectively, our results suggest that stock options might not always encourage managers to pursue projects that are primarily characterized by idiosyncratic risk when projects with systematic risk are available as an alternative.     

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.     

Bank CEO incentives and the credit crisis

We investigate whether bank performance during the recent credit crisis is related to chief executive officer (CEO) incentives before the crisis. We find some evidence that banks with CEOs whose incentives were better aligned with the interests of shareholders performed worse and no evidence that they performed better. Banks with higher option compensation and a larger fraction of compensation in cash bonuses for their CEOs did not perform worse during the crisis. Bank CEOs did not reduce their holdings of shares in anticipation of the crisis or during the crisis. Consequently, they suffered extremely large wealth losses in the wake of the crisis.     

Managerial Entrenchment and Capital Structure Decisions

We study associations between managerial entrenchment and firms' capital structures, with results generally suggesting that entrenched CEOs seek to avoid debt. In a cross-sectional analysis, we find that leverage levels are lower when CEOs do not face pressure from either ownership and compensation incentives or active monitoring. In an analysis of leverage changes, we find that leverage increases in the aftermath of entrenchment-reducing shocks to managerial security, including unsuccessful tender offers, involuntary CEO replacements, and the addition to the board of major stockholders.     

Restricting CEO pay

We analyze several proposals to restrict CEO compensation and calibrate two models of executive compensation that describe how firms would react to different types of restrictions. We find that many restrictions would have unintended consequences. Restrictions on total realized (ex-post) payouts lead to higher average compensation, higher rewards for mediocre performance, lower risk-taking incentives, and the fact that some CEOs would be better off with a restriction than without it. Restrictions on total ex-ante pay lead to a reduction in the firm's demand for CEO talent and effort. Restrictions on particular pay components, and especially on cash payouts, can be easily circumvented. While restrictions on option pay lead to lower risk-taking incentives, restrictions on incentive pay (stock and options) result in higher risk-taking incentives.     

Serial CEO incentives and the structure of managerial contracts

I explore CEOs’ incentives to select firm strategies and to acquire firm-specific skills when CEOs have job-hopping opportunities. Several features of managerial compensation, such as benchmarking of pay to larger and more prestigious companies, payments unrelated to past performance, unrestricted stock awards for highly paid CEOs, long-term incentives, and higher pay in companies granting long-term incentives, emerge in the optimal contract. I argue that the model can explain the change in the structure and the surge in US CEO compensation as well as differences across countries and across firms within a country.     

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.     

Powerful CEOs and stock price crash risk

We find that powerful chief executive officers (CEOs) are associated with higher crash risk. The positive association between CEO power and crash risk holds when controlling for earnings management, tax avoidance, chief executive officer's option incentives, and CEO overconfidence. Firms with powerful CEOs have higher probability of financial restatements, lower proportion of negative to positive earnings guidance, and lower ratio of negative to positive words in their financial statements. The association between powerful CEOs and higher crash risk is mostly evident among firms with higher sensitivity of CEO wealth to stock prices and when CEOs have lower general skills. External monitoring mechanisms weaken but do not eliminate the association between powerful founder CEOs and higher crash risk.     

CEO incentives and the cost of debt

Motivated by concerns that stock-based compensation might lead to excessive risk-taking, this paper’s main purpose is to examine the relations between CEO incentives and the cost of debt. Unlike prior research, this paper uses the sensitivities of CEO stock and option portfolios to stock price (delta) and stock return volatility (vega) to measure CEO incentives to invest in risky projects. Higher delta (vega) is predicted to be related to lower (higher) cost of debt. The results show that yield spreads on new debt issues are lower for firms with higher CEO delta and are unrelated to CEO vega. The results also show that yield spreads are higher for firms whose CEOs hold more shares and stock options. In sum, the results suggest that both percentage-ownership and option sensitivity variables are important in understanding relations between CEO incentives and the cost of debt.     

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.     

CEO EQUITY PORTFOLIO INCENTIVES AND LAYOFF DECISIONS

CEOs with higher equity‐based compensation are widely believed to be more likely to act in shareholders' interests. Unlike less common acquisitions, voluntary liquidations, or seasoned equity offerings, layoffs are comparatively common elements of firms' operating strategies. We find that CEOs with at least one year of tenure who possess greater incentives from portfolios of restricted stock and stock option grants are more likely to announce layoffs, and that these layoffs create shareholder value. We conclude that accumulated portfolios of restricted stock and stock option grants encourage CEOs to adopt operating strategies that improve operating profits and stock performance.     

Do Entrenched Managers Pay Their Workers More?

Analyzing a panel that matches public firms with worker-level data, we find that managerial entrenchment affects workers' pay. CEOs with more control pay their workers more, but financial incentives through cash flow rights ownership mitigate such behavior. Entrenched CEOs pay more to employees closer to them in the corporate hierarchy, geographically closer to the headquarters, and associated with conflict-inclined unions. The evidence is consistent with entrenched CEOs paying more to enjoy private benefits such as lower effort wage bargaining and improved social relations with employees. Our results show that managerial ownership and corporate governance can play an important role for employee compensation.     

Corporate governance when founders are directors

We examine chief executive officer (CEO) compensation, CEO retention policies, and mergers and acquisition (M&A) decisions in firms in which founders serve as a director with a nonfounder CEO (founder-director firms). We find that founder-director firms offer a different mix of incentives to their CEOs than other firms. Pay-for-performance sensitivity for nonfounder CEOs in founder-director firms is higher and the level of pay is lower than that of other CEOs. CEO turnover sensitivity to firm performance is also significantly higher in founder-director firms compared with nonfounder firms. Overall, the evidence suggests that boards with founder-directors provide more high-powered incentives in the form of pay and retention policies than the average US board. Stock returns around M&A announcements and board attendance are also higher in founder-director firms compared with nonfounder firms.