The purpose of this paper is to examine CEO wealth changes around seasoned equity offerings (SEOs) to explore the shareholder-manager incentive alignment in major corporate equity financing decisions.
The authors decompose CEO wealth into three major components: price effect, board compensation grant, and CEO’s own portfolio adjustment. The authors then compare SEO-event sample vs non-event samples; and evaluate the dynamic and long-run CEO wealth effect.
The authors find when market reacts negatively to SEO announcement leading to losses in CEO’s existing firm-related wealth, CEO gets additional grants to offset the losses. Although this appears to be a rent-seeking activity, the authors find that the additional grants are mainly in the form of stock options which would have no value if stock price failed to pick up in the future. In this sense, the additional grants align the interests between shareholders and managers. Consistent with this argument, the authors show that the additional grants motivate CEOs to promote the stock performance, benefiting themselves as well as shareholders in the long-run.
The study explicitly calculates the contribution of each wealth component to CEO total wealth effect. The results improve the understanding of CEO compensation policy change after major corporate event and contribute to the literature of the optimality explanation of prevailing compensation policy.
JEL Classification — G32, J33
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