Incentive effects of executive compensation and the valuation of firm assets |
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| Authors: | Matthew L. O'Connor Matthew Rafferty |
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| Affiliation: | 1. W.P. Carey School of Business, Arizona State University, Tempe, AZ 85287, USA;2. Robert and Maria Lowden Chair of Finance, Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA;3. Samuel S. Stewart, Jr. Presidential Chair in Business, David Eccles School of Business, University of Utah, Salt Lake City, UT 84112, USA;4. Neeley School of Business, Texas Christian University, Fort Worth, TX 76129, USA |
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| Abstract: | This paper examines how executive compensation influences the market value of the firm's assets. After controlling for endogeneity, we find that boards have set the incentive to incur risk (vega) to maximize shareholder value, but that incentives to increase returns (delta) do not maximize shareholder value. We also find that current levels of cash compensation do not maximize shareholder value. Finally, we consider the moneyness of stock options. We find that the level of at- and out-of-the money options maximize shareholder value, but the level of in-the money options do not maximize shareholder value. |
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