Posts Tagged ‘Incentives’

Misalignment Between Corporate Economic Performance, Shareholder Return And Executive Compensation

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday December 3, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Mark Van Clieaf and Karel Leeflang of Organizational Capital Partners and Stephen O’Byrne of Shareholder Value Advisors; the full report is available here.

Investors, directors and corporate executive management share common interests when it comes to company performance and economic value creation.

Yet, whilst this commonality is laudable, a review of performance measurement and long-term incentive plan design for USA public companies identifies that current practice is less than clear in measuring and aligning these interests in a manner that is robust and meaningful.

…continue reading: Misalignment Between Corporate Economic Performance, Shareholder Return And Executive Compensation

Short Selling Pressure, Stock Price Behavior, and Management Forecast Precision

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday December 1, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Yinghua Li of the School of Accountancy at Arizona State University and Liandong Zhang at City University of Hong Kong.

Corporate executives pay considerable attention to secondary market prices and they have strong incentives to maintain or increase the level of their firms’ stock prices. The accounting literature has long recognized that managers can make strategic financial reporting or disclosure choices to influence stock prices. A large body of empirical research examines whether and how corporate disclosures affect stock prices. The literature, however, provides little directional evidence on whether the behavior of stock prices has a causal effect on managerial strategic disclosure decisions. The difficulty in establishing causality stems largely from the endogenous nature of stock prices. In the paper, Short Selling Pressure, Stock Price Behavior, and Management Forecast Precision: Evidence from a Natural Experiment, which is forthcoming in Journal of Accounting Research, we use a randomized experiment, the Regulation SHO pilot program, to examine the causal effect of stock price behavior on managers’ voluntary disclosure choices.

…continue reading: Short Selling Pressure, Stock Price Behavior, and Management Forecast Precision

Shirking CEOs

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 18, 2014 at 9:11 am
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Editor’s Note: The following post comes to us from Lee Biggerstaff of the Department of Finance at Miami University of Ohio; David Cicero of the Department of Finance at the University of Alabama; and Andy Puckett of the Department of Finance at the University of Tennessee, Knoxville.

Anytime you hire someone there is always a risk that they will not complete their task with the level of diligence that you had anticipated. Unless you monitor the hired party at all times, which can be extremely inefficient, they always have the temptation to “shirk” their responsibilities and avoid the hard work required to do an excellent job. In our paper, FORE! An Analysis of CEO Shirking, which was recently made publicly available on SSRN, we provide evidence that some CEOs of public companies in the U.S. succumb to the same temptation to shirk their duties to shareholders by choosing leisure consumption over the hard work required to maximize firm values.

…continue reading: Shirking CEOs

Relative Total Shareholder Return Performance Awards

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday November 14, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Frederic W. Cook & Co., Inc., and is based on the Executive Summary of a FW Cook publication by David Cole and Jin Fu. The complete publication is available here.

Since 2010, performance-contingent awards have been the most widely used long-term incentive (LTI) grant type among the Top 250 companies [1] and are now in use by 89% of the sample. The prevalence of performance awards and investor preferences have spurred considerable interest in relative total shareholder return (TSR) as a performance metric. Relative TSR measures a company’s shareholder returns [2] against an external comparator group and eliminates the need to set multi-year goals. Use of relative TSR performance awards among the Top 250 companies has increased from 29% in 2010 to 49% in 2014, and relative TSR is now the most prevalent measure used to evaluate company performance for performance awards.

…continue reading: Relative Total Shareholder Return Performance Awards

Strategic News Releases in Equity Vesting Months

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday November 11, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Alex Edmans, Professor of Finance at London Business School; Luis Goncalves-Pinto of the Department of Finance at the National University of Singapore; Yanbo Wang of the Finance Area at INSEAD; and Moqi Xu of the Department of Finance at the London School of Economics.

In our paper, Strategic News Releases in Equity Vesting Months, which was recently made publicly available on SSRN, we study the link between the equity vesting schedules of CEOs and the timing of corporate news releases. We show that, in months in which the CEO has equity vesting, the firm releases more news. This is an easy way to pump up the short-term stock price, as news attracts attention to the stock. This attention also increases trading volume, which allows the CEO to cash out his equity in a more liquid market. Indeed, we find that these news releases lead to significant increases in the stock price and trading volume in a 16-day window, but the effect dies down over 31 days, consistent with a temporary attention boost. The median CEO cashes out all of his vesting equity within seven days—within the window of price and volume inflation.

…continue reading: Strategic News Releases in Equity Vesting Months

What Has Happened To Stock Options?

Posted by Joseph E. Bachelder III, McCarter & English, LLP, on Thursday October 2, 2014 at 9:05 am
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Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Stock options have been a part of executive pay at major U.S. corporations for approximately 100 years. They have had an important role for approximately 70 years, starting in the 1950s. They have gone through periods of extraordinary popularity (e.g., the 1990s) and have been less popular during periods when the stock markets were in the doldrums. They survived the change in accounting rules (2006) that now require them to be a charge against earnings. This post examines this history and takes a look at where options are today. [1]

…continue reading: What Has Happened To Stock Options?

Executive Gatekeepers: Useful and Divertible Governance?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Adair Morse of the Finance Group at the University of California, Berkeley; and Wei Wang and Serena Wu, both of Queen’s School of Business, Canada.

In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?

…continue reading: Executive Gatekeepers: Useful and Divertible Governance?

Compensating for Long-Term Value Creation in U.S. Public Corporations

Editor’s Note: Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

Three categories of performers are rewarded for value creation in U.S. public corporations. They are: (1) the executives who manage the corporations; (2) the directors who oversee the performance of these corporations; and (3) the individual asset managers and others who provide investment services to investors who own, directly or indirectly, these corporations.

The following post takes a look at the correlation between the long-term incentive compensation of these three categories of performers and long-term value creation in U.S. public corporations that is attributable to them. In fact, such correlation appears to be limited. In addition, the article will consider a definition of “long-term” value creation, the roles of these three categories of performers in creating “long-term” value and the methods of compensating these different categories of performers in their respective roles in “long-term” value creation.

…continue reading: Compensating for Long-Term Value Creation in U.S. Public Corporations

How to Use a Bank Tax to Make the Financial System Safer

Posted by Mark Roe, Harvard Law School, on Tuesday March 25, 2014 at 9:21 am
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an op-ed by Professor Roe and Michael Tröge that was published today in The Financial Times, which can be found here.

A tax on the balance sheets of big banks—first proposed by US President Barack Obama in 2010 but later shelved—is back on the political agenda. Last month Dave Camp, Republican chairman of the House of Representatives Ways and Means Committee, put forward a proposal for tax reform that included a 0.035 per cent levy on bank assets more than $500bn. This would hit large institutions such as Bank of America, Citigroup and Goldman Sachs.

The aim of the Republican plan is to find tax revenue that could be used to offset cuts in income taxes on individuals. Mr. Obama pitched his proposal as a way of raising money from US banks to help repay taxpayers who had to bail them out at the height of the crisis. Neither plan aims to make the financial system safer, and neither would. But with a few alterations, a balance-sheet tax could help strengthen the banks.

…continue reading: How to Use a Bank Tax to Make the Financial System Safer

Risk Choice under High-Water Marks

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday March 20, 2014 at 9:03 am
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Editor’s Note: The following post comes to us from Itamar Drechsler of the Department of Finance at New York University Stern School of Business.

High-water mark (HWM) contracts are the predominant compensation structure for managers in the hedge fund industry. In the paper, Risk Choice under High-Water Marks, forthcoming in the Review of Financial Studies, I seek to understand the optimal dynamic risk-taking strategy of a hedge fund manager who is compensated under such a contract. This is both an interesting portfolio-choice question, and one with potentially important ramifications for the willingness of hedge funds to bear risk in their role as arbitrageurs and liquidity providers, especially in times of crises. High-water mark mechanisms are also implicit in other types of compensation structures, so insights from this question extend beyond hedge funds. An example is a corporate manager who is paid performance bonuses based on record earnings or stock price and whose choice of projects influences the firm’s level of risk.

…continue reading: Risk Choice under High-Water Marks

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