The Determinants of CEO Inside Debt and its Components

Cen, Wei

doi:10.2139/ssrn.1716306

Cited by 16 publications

(10 citation statements)

References 21 publications

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“…As far as controlled variables are concerned, our results show that UK CEOs would have more DB pensions if their firms are larger and more geared, which is consistent with US studies (e.g., Sundaram & Yermack, 2007). Older CEOs in the UK would have more pensions, which is also in line with the US literature (e.g., Cen, 2010; Sundaram & Yermack, 2007). However, CEOs in the UK have fewer DB pensions if their firms have a higher proportion of independent directors, which opposes findings in the US (e.g., Cen, 2010).…”

Section: Resultssupporting

confidence: 85%

Inside debt and firm risk‐taking: Evidence from the UK pension reform

Zhao

2020

Business Fin & Account

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This paper provides new evidence on the relation between CEO inside debt and firm risk‐taking by exploiting the change in the tax treatment of UK pensions following two pension amendments. The 2006 pension reform introduces the annual and lifetime allowance for UK pension schemes, significantly increasing income taxes associated with CEO inside debt. The 2011 allowance cut, which substantially reduces the annual allowance introduced in 2006, further increases income taxes on inside debt. We find that CEO inside debt, in the form of executive pensions declines after the 2006 reform while cash‐in‐lieu increases significantly. This effect is more severe after the 2011 allowance cut than the 2006 pension reform. UK firms appear to substitute away from pensions towards cash‐in‐lieu, where income taxes are less punishing. If the association between CEO inside debt and firm risk‐taking is causal, we should observe a change of risk‐taking after the decline of inside debt. Our results, which exploit the exogenous nature of the reforms, show that the decline of CEO pensions does not lead to any change in firm risk‐taking. This result suggests that no causal relationship exists between CEO inside debt and firm risk‐taking. Our results extend the inside debt literature, where empirical evidence is mainly documented in the US. Contrary to findings in the US, our evidence suggests that the use of CEO inside debt is motivated to minimise income tax rather than a tool to moderate firm risk.

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Section: Resultssupporting

confidence: 85%

Inside debt and firm risk‐taking: Evidence from the UK pension reform

Zhao

2020

Business Fin & Account

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“…Although the personal income tax rate and its change impact deferred compensation, they do not logically relate to earnings management and were used as instrumental variables [56]. Moreover, Cen [84] analyzed the determinants of deferred compensation to demonstrate that deferred compensation increased when cash compensation and managers' wealth were greater. This is because the deferred payment's benefit of tax savings increases with a decreased need for cash.…”

Section: Endogeneitymentioning

confidence: 99%

“…Therefore, managers' wealth and the size of cash compensation were used as instrumental variables, as they impact deferred compensation and do not logically relate to earnings management. While Cen's [84] study measured wealth based on the change in managers' equity value of the firm, this study measured it with the average compensation of executives subject to remuneration disclosure, in considering the availability of research data. An over-identification test for the instrumental variables' validity indicated no correlation between instrumental variables and error terms (p = 0.3995).…”

Section: Endogeneitymentioning

confidence: 99%

The Effect of the Compensation System on Earnings Management and Sustainability: Evidence from Korea Banks

Lee

Hwang

2019

Sustainability

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Since the global financial crisis, management incentive compensation, which is sensitive to financial firms’ short-term performance, has been noted to threaten financial systems’ sustainability by incentivizing managers to pursue excessive risks. Subsequently, international standards have been established regarding compensation for financial institutions’ senior executives and employees. However, this compensation may impact not only banks’ risk-taking behaviors, but also their earnings management, as the latter affects financial performance while compensation is decided as a reflection of such performance. Therefore, this study analyses executive compensation’s impact on banks’ earnings management using compensation data on South Korean banks. The analysis revealed higher earnings management using a loan loss provision with more variable compensation. On the one hand, if the proportion of equity-linked compensation to incentive compensation increased, then earnings management increased. On the other hand, more deferred compensation led to increased earnings smoothing. This study evaluates regulatory impacts across multiple dimensions by analyzing the effects of incentive compensation standards—intended to increase financial systems’ sustainability—on individual financial institutions and further contributes to studies on managerial decision making.

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“…99 Professor Cen similarly employed an NOL dummy in his 2011 study of the determinants of CEO inside debt, a variable that generally was not statistically significant. 100 In a 2010 paper, Professor Gerakos investigated the tradeoff that is made between CEO pay and non-qualified pension benefits. 101 He recognized that low MTR firms should be more likely to favor deferred compensation but he found that companies providing pensions are significantly less likely to have NOLs for the three prior years.…”

Section: Nonqualified Deferred Compensation/inside Debt Studiesmentioning

confidence: 99%

Employer Losses and Deferred Compensation

Walker

2019

SSRN Journal

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Most large public companies offer their executives the opportunity to defer the receipt and taxation of a portion of their salary or other current compensation until retirement or some other future date, and equity compensation, which also entails deferral of pay and taxation, constitutes a large fraction of the typical executive pay package. Conventional wisdom holds that employer net operating losses (NOLs) improve the joint economics of deferred and equity compensation (henceforth together "deferred compensation") for the parties. However, empirical studies provide little evidence of an association between employer NOLs and deferred compensation use. This paper focuses on two potential explanations for this apparent disconnect. First, this paper shows that the relationship between employer NOLs and the attractiveness of deferred compensation is more complex and less predictable than is generally recognized, that a larger NOL position does not necessarily produce a larger driving force for use of deferred compensation, and that in some cases employer NOLs can actually result in poorer deferred compensation economics. As a result, some employers and executives may rationally choose to ignore employer NOLs when making compensation decisions. Second, even if companies are sensitive to the existence of employer NOLs when making compensation decisions, it is not clear that research methods currently in use would detect the sensitivity. The commonly used proxies and simulations of employer effective marginal tax rates that have been employed in these studies may not adequately capture the complexity of the relationship between NOLs and the economics of deferred compensation. * Professor of Law and Maurice Poch Faculty Research Scholar, Boston University School of Law. Acknowledgments to follow. Draft of July 31, 2019. Please do not cite without author's permission. Equity--Based CompensationThe most important and noticeable change in equity--based pay over the past two decades has been the declining use of stock options and offsetting increased use of performance share awards. 63 In 1990, options accounted for over 60% of the total ex ante value of compensation granted to the median S&P 500 senior executive. In 2013 options accounted for less than 20%, while performance awards accounted for over 30%. 64 This transformation has had a significant impact on deferral periods. While options are typically exercisable for ten years, and typically exercised within five or six years, performance awards typically cover a three--year period. 65 To the extent that performance share awards have displaced options, the deferral period associated with equity pay has been reduced by about half.To be sure, start--ups remain somewhat more likely than mature public companies to issue options, and start--ups are more likely to be in an NOL position, but NOLs are by no means limited to start--ups. 66

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The Determinants of CEO Inside Debt and its Components

Cited by 16 publications

References 21 publications

Inside debt and firm risk‐taking: Evidence from the UK pension reform

Inside debt and firm risk‐taking: Evidence from the UK pension reform

The Effect of the Compensation System on Earnings Management and Sustainability: Evidence from Korea Banks

Employer Losses and Deferred Compensation

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