Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value

Benson, Bradley W.; James, Hui L.; Park, Jung Chul

doi:10.1111/fire.12185

Cited by 7 publications

(2 citation statements)

References 160 publications

(206 reference statements)

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“…A recent study by Kwon et al (2019) confirms that SOX has increased firm conservatism and led to revisions in executive compensation contracts that reduces pay-performance sensitivity. Along the same lines, Benson et al (2019) find a reduced role of Delta in compensation post-SOX. Cohen et al (2013) show that SOX led to a reduction in the sensitivity of corporate investment to executive compensation.…”

Section: Sox and Risk-seeking Incentives From Executive Compensationmentioning

confidence: 71%

“…Sales_Growth is the natural logarithm of the ratio of bidder's sales in the year preceding the acquisition announcement (t − 1) to sales in the previous year (t − 2). Since risk-taking incentives are positively related to the firm's investment opportunities (Guay 1999;Benson et al 2019) we expect a positive relation between sales growth and firm risk. Cash/Assets is the ratio of cash and cash equivalents to total assets.…”

Section: Control Variablesmentioning

confidence: 99%

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How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

Hillier

McColgan

Tsekeris

2021

Rev Quant Finan Acc

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We examine the impact of incentive compensation on the riskiness of acquisition decisions before and after the passage of the Sarbanes–Oxley Act (SOX). Before SOX, equity-based compensation was positively related to changes in risk around acquisition decisions, but this relationship weakened after the introduction of SOX. The drop in post-SOX acquisition-related risk stems from how managers respond to compensation-based incentives in the new regulatory environment. We show that executive stock options and pay-risk sensitivity drive post-SOX managerial responsiveness to risk-taking incentives. We also document a post-SOX value-enhancing effect on long-term stock-price performance and total factor productivity through these same incentive compensation mechanisms. The results are robust to selection bias, simultaneity, measurements of risk, and the definition of incentive compensation.

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Section: Sox and Risk-seeking Incentives From Executive Compensationmentioning

confidence: 71%

Section: Control Variablesmentioning

confidence: 99%

How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

Hillier

McColgan

Tsekeris

2021

Rev Quant Finan Acc

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Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review

Rousseau,

Kim,

Splenda

et al. 2023

Campbell Systematic Reviews

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BackgroundFinancial incentives for chief executive officers (CEOs) are thought to motivate them to lead their company toward achieving important business objectives. Based on the Rousseau et al. (2019) protocol, this systematic review assesses the predictive effects of CEO incentives on certain business outcomes.ObjectivesThis review addresses whether CEO financial incentives predict: (1) firm financial performance and (2) financial restatement due to misreporting.Search methodsWe searched nine research databases for published peer‐reviewed literature (to July 23–26, 2021 and an attenuated search from those dates to July 27–31, 2023) and thirteen professional association websites for non‐published gray literature (to August 2021). We also hand‐searched selected relevant journals.Selection criteriaWe reviewed peer‐reviewed and unpublished studies available in English since 1980. Eligible studies regarding our first question assessed CEO financial incentives (1) 1 year or more before the measurement of outcomes, (2) controlled for pre‐incentive firm performance or market conditions, and (3) analyzed CEO financial incentives as predictors of firm outcomes. Eligible studies regarding our second question assessed whether financial restatement had occurred and analyzed effects of CEO incentives on this outcome.Data collection and analysisWe extracted standardized regression coefficients for each effect or converted unstandardized regressions to standardized. Analyses were conducted using STATA. All studies were assessed to have moderate risk of bias.Main resultsFor our first question, 20 studies (15,398 firms) met our criteria for meta‐analysis of effects. Bonuses, the most commonly studied incentive, had a small positive effect on next year's accounting performance metric Return on Assets (ROA, 0.046 [k = 7, 95% confidence interval (CI) = 0.014, 0.078]). The bonus effect in the market‐related metric of Stock Returns (−0.026 [k = 5, 95% CI = −0.119, 0.067]) fell within a CI including 0, as did its effect on another market‐related metric, Market‐to‐Book value (Tobin's Q, 0.028 [k = 3, 95% CI = −0.024, 0.08]). We conclude that Bonuses show no predictive effect on the following year's market‐related metrics but do affect ROA. Stock Options had no effect on next year's ROA (0.027 [k = 5, 0.95% CI = 0.000, 0.052]), nor on Market‐to‐Book Value (Tobin's Q, 0.097 [k = 5, 95% CI = −0.027, 0.220]) or Stock Return (0.042 [k = 6, −0.033, 0.117]), indicating no predictive effect for Stock Options on either accounting or market‐related performance. We sought but found too few studies to report on effects of incentives on other financial outcomes or for lags greater than 1 year. For our second question, three studies (n = 2044 firms) met our criteria. The overall effect size for CEO Incentives on Restatement (−0.09 [k = 3, 95% CI = −0.363, 0.184) fell within a CI including zero. We conclude that current evidence does not support a direct relationship between CEO financial incentives and Restatement.Authors' conclusionsThis review affirms a small effect of CEO Bonuses, but no effect of Stock Options, on the accounting performance metric ROA. In contrast, neither Bonuses nor Stock Options predict a firm's market‐related metrics. CEO incentives also are unrelated to Financial Restatement. Despite widespread use of CEO financial incentives, lack of evidence supporting their use, beyond the bonus‐ROA effect we identify, suggests caution regarding current CEO financial incentive practice and greater consideration of alternative arrangements to enhance firm performance.

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A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms

Olaniyi

Olayeni

2020

J. Soc. Econ. Dev.

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Heterogeneity in the Effect of Managerial Equity Incentives on Firm Value

Cited by 7 publications

References 160 publications

How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

How did the Sarbanes–Oxley Act affect managerial incentives? Evidence from corporate acquisitions

Does chief executive compensation predict financial performance or inaccurate financial reporting in listed companies: A systematic review

A new perspective into the relationship between CEO pay and firm performance: evidence from Nigeria’s listed firms

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