Differential Risk Taking Implications of Performance Incentives from Stock and Stock Option Holdings

Savaşer, Tanseli; Ciamarra, Elif Sisli

doi:10.2139/ssrn.2831581

Cited by 1 publication

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“…6. Savaser and Sisli-Ciamarra (2016) also examine stock and options separately. Specifically, they find that stock deltas and option deltas effect firm riskiness differently and need to be considered separately.…”

Section: Notesmentioning

confidence: 99%

CEO incentive pay around performance declines

Canil

Rosser

2018

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Purpose The authors study stock and option grants around abrupt performance declines for continuing CEOs and find that firms facing abrupt financial declines grant more options than stock, while firms facing operational decline grant more stock than options. Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. The paper aims to discuss these issues. Design/methodology/approach To establish causality, the authors exploit compensation changes instigated by FAS 123R accounting regulation in 2005 that mandated stock option expensing. Findings Firms making these adjustments just prior to performance declines outperform those that do not for three years following the decline and are less likely to engage in asset restructuring. The result is robust to numerous tests, including rebalancing of incentives and CEO turnover. Originality/value Several studies examine the relationship between poor performance and compensation of newly appointed CEOs. But firms regularly employ retention or incentive plans when experiencing distress to prevent critical employees from leaving when they are most needed (Goyal and Wang, 2017). Employee turnover results in a loss of continuity coupled with high search and training costs for replacement personnel. Beneish et al. (2017) find that 57 percent of CEOs associated with intentional misreporting retain their jobs, implying the costs of removing CEOs is high, especially if the incumbent CEO has a strong track record relative to industry peers prior to the period before the misreporting begins. The board fires the CEO if future firm value under the CEO is expected to be lower than under the best alternative CEO less adjustment costs (e.g. search costs, severance pay).

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Section: Notesmentioning

confidence: 99%

CEO incentive pay around performance declines

Canil

Rosser

2018

View full text Add to dashboard Cite

show abstract

Differential Risk Taking Implications of Performance Incentives from Stock and Stock Option Holdings

Cited by 1 publication

References 64 publications

CEO incentive pay around performance declines

CEO incentive pay around performance declines

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