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Article
Publication date: 12 January 2015

Yilei Zhang and Yi Jiang

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…

Abstract

Purpose

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.

Design/methodology/approach

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.

Findings

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.

Originality/value

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.

Details

Managerial Finance, vol. 41 no. 1
Type: Research Article
ISSN: 0307-4358

Keywords

Book part
Publication date: 11 August 2014

Zhan Jiang, Kenneth A. Kim and Yilei Zhang

The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms…

Abstract

Purpose

The change in CEO pay after their firms make large corporate investments is examined. Whether the change in CEO pay is a beneficial practice or harmful practice to firms is investigated.

Design/Methodology/Approach

A sample of firms that make large corporate investments is identified. For this sample, we identify the change in CEO pay before and after the investment, and we also measure the pay-for-size sensitivity of these investing firms.

Findings

For firms that make large corporate investments, CEOs get significantly more option grants when their firms’ stock returns are negative after the investments and these investing CEOs get more option grants than noninvesting CEOs.

Research Limitations/Implications

The present study suggests that firms may have to increase CEO pay after large corporate investments to encourage investment. However, the results may also be consistent with an agency cost explanation. Future research should try to distinguish between the two explanations.

Social Implications

The study reveals a potential way to prevent CEOs from underinvesting.

Originality/Value

The study provides important insights to shareholders on how to encourage CEOs to get their firms to invest, and on how to view CEO pay increases after their firms invest.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78350-120-5

Keywords

Article
Publication date: 7 June 2021

Charles Danso, Margarita Kaprielyan and Md Miran Hossain

Recent studies explore how chief executive officer (CEO) social capital affects corporate decision-making. Well-connected CEOs can have greater access to information…

Abstract

Purpose

Recent studies explore how chief executive officer (CEO) social capital affects corporate decision-making. Well-connected CEOs can have greater access to information, which can lead to better corporate decisions or permit them to amass power from hierarchy status and make self-serving decisions. This study examines whether investors perceive CEO social capital as a signal of good decision-making (assuming information asymmetry) surrounding asset sell-off events.

Design/methodology/approach

The authors use multivariate regression analysis to examine the effect of CEO social capital on the cumulative abnormal returns (CARs) of the asset buyers and sellers. CARs are estimated using a market model in the period proximate to asset sell-off announcements.

Findings

The authors find that CEO social capital is positively associated with announcement returns of the asset sellers. Moreover, the positive effect of CEO social capital on announcement returns is more pronounced for sellers facing greater information asymmetry. An analysis of post-announcement stock performance reveals that the seller CEO social capital is associated with additional value generated for the shareholders of the seller after a month from the announcement date, especially if the transaction price is disclosed. Overall, findings are consistent with the argument that CEO social capital provides value in high information asymmetry environment.

Originality/value

To the authors' knowledge this is the first study to examine the effect of CEO social capital on the shareholders' wealth created by divestitures.

Details

Managerial Finance, vol. 47 no. 11
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 28 August 2018

Katarzyna Byrka-Kita, Mateusz Czerwiński, Agnieszka Preś-Perepeczo and Tomasz Wiśniewski

The purpose of this paper is to analyse the market reaction to the appointments of chief executive officers (CEOs) in companies listed on the Warsaw Stock Exchange. The…

Abstract

Purpose

The purpose of this paper is to analyse the market reaction to the appointments of chief executive officers (CEOs) in companies listed on the Warsaw Stock Exchange. The authors focussed on the relationship between the characteristics of a newly appointed CEO and the shareholders’ reactions to the appointment of a CEO.

Design/methodology/approach

To measure shareholder reaction, the authors apply an event study methodology. The determinants of reaction are identified on the basis of multi-regression analysis.

Findings

The results reveal a negative market reaction to all CEO appointments, both new appointments and reappointments. Investor reaction is driven more by the financial condition of the company, the company’s market performance and the free float, than by the characteristics of a newly appointed CEO. Neither the origins and generation (age) nor the gender of a CEO influence share prices. The relationship between the educational background of a CEO and shareholders’ reactions is mixed. Furthermore, the appointment of an inexperienced CEO seems to be preferred by investors.

Research limitations/implications

The study is restricted by certain limitations related to the adopted measures, the single-market research, data gaps and the selection of variables for regression analysis. A further cross-country study including Central and Eastern Europe and/or the transition economies of the Baltic Region is recommended. The relationship between the operating performance of a firm and its internal control mechanisms could be explored.

Practical implications

The findings might influence the decisions made by company owners and supervisory boards when appointing top executives, and might contribute to a better understanding of how CEO appointments can affect shareholder value creation. The results also provide important guidelines for institutions that oversee the financial system.

Originality/value

The findings of this study are expected to the findings are expected to contribute to the literature on the empirical analysis of the shareholder wealth effect, on signalling theory, on the phenomenon of information asymmetry and on corporate governance. The study covers a full economic cycle of the capital market, including the financial crisis and financial bubbles, and it fills a gap in the research regarding emerging markets and transition economies in Europe.

Details

Baltic Journal of Management, vol. 13 no. 4
Type: Research Article
ISSN: 1746-5265

Keywords

Article
Publication date: 16 February 2021

Nicolette Chatelier Prugsamatz

The purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether…

Abstract

Purpose

The purpose of this paper is to investigate whether innovation effort is lower for firms exhibiting signs of higher chief executive officer (CEO) dominance and whether such CEOs can be incentivized to pursue risky ventures such as innovation projects in line with shareholder's interests that are geared toward the long-term growth of the firm.

Design/methodology/approach

The paper utilizes panel data of US publicly listed companies (2007–2016) to address the influence of CEO dominance on firm innovation effort and the moderating effects of incentives in this relationship through ordinary least squares (OLS) estimations. A two-stage least squares (2SLS) technique is also employed to address possible endogeneity. As a robustness check, further analysis is conducted utilizing an alternative proxy for CEO incentive as well as Tobit analysis (with panel-level random effects).

Findings

Results from both OLS and Tobit estimations offer two key findings. First, there is a significantly negative relationship between CEO pay slice and firm research and development (R&D) intensity. Second, the interaction effect of CEO incentives and CEO dominance is significant and positive.

Research limitations/implications

When provided with the right incentives, such as those that reward long-term performance, dominant CEOs can be incentivized to go after risky ventures like innovation projects that are crucial to promoting the long-term growth of the firm.

Originality/value

This paper utilizes R&D instead of patent outputs as proxies for innovation where the former enables studying R&D efforts for more recent periods compared to prior studies that utilize patent data.

Details

Managerial Finance, vol. 47 no. 7
Type: Research Article
ISSN: 0307-4358

Keywords

Article
Publication date: 28 September 2012

Michael J. Alderson and Brian L. Betker

The purpose of this paper is to examine the impact of managerial risk exposure on capital structure selection (net debt, or debt minus cash) as well as return on assets…

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Abstract

Purpose

The purpose of this paper is to examine the impact of managerial risk exposure on capital structure selection (net debt, or debt minus cash) as well as return on assets, capital expenditures, research and development expenditures and stock price performance.

Design/methodology/approach

The paper compares a sample of 123 all‐equity firms to a set of matching levered firms selected on the basis of industry, market cap and market‐to‐book assets. Managerial incentives are measured using the delta and vega of the manager's stock and option holdings.

Findings

Net debt levels decline as CEO wealth sensitivity to stock price changes (delta) increases. However, the paper finds no differences between the all‐equity firms and their levered matching firms in terms of return on assets, capital expenditures, R&D expense, or long run stock price performance.

Research limitations/implications

Findings are consistent with the idea that managerial incentives drive net debt decisions even among all‐equity firms. However, given that there are no differences between the sample firms and their matched firms in terms of investment or stock price performance, the effect of managerial risk aversion appears to be confined to financial policy.

Originality/value

The paper uses modern methods for measuring managerial risk exposure to revisit the literature on all‐equity firms, and show that managerial risk exposure affects the net debt decision in these firms.

Details

Studies in Economics and Finance, vol. 29 no. 4
Type: Research Article
ISSN: 1086-7376

Keywords

Article
Publication date: 23 February 2021

Khurram Iftikhar Bhatti, Muhammad Iftikhar Ul Husnain, Abubakr Saeed, Iram Naz and Syed Danial Hashmi

This study examines the role of the observable and unobservable characteristics of top management on earning management and firm risk in China.

Abstract

Purpose

This study examines the role of the observable and unobservable characteristics of top management on earning management and firm risk in China.

Design/methodology/approach

The authors used manager-firm matched panel for 104 non-financial firms listed on the Shanghai Stock Exchange between 2010 and 2018. The authors also trace the persistence of managerial financial styles and their active role across two different firms between which managers switched during the sample period.

Findings

The results show that managers' financial styles indeed influence earning management and firm risk and that this influence differs across different managers. These findings are robust when tested for the persistence and active role of managers. Furthermore, individual characteristics such as age, gender, qualification and experience influence managers' financial styles.

Practical implications

Given their findings, the authors propose that financial analysts and potential investors should not only depend on quantitative data but also consider the individual characteristics of managers when evaluating firms.

Social implications

The findings of this study carry serious implications for managers, policymakers and potential investors. The findings assist the external auditors in measuring the risk of material misstatement, the various regulatory bodies to assess the quality of financial reporting and the users of financial statements to evaluate the earnings and make further investment decisions considering not only the quantitative data but also the individual characteristics of top managers.

Originality/value

The current study examines the observable and unobservable characteristics of top management on firm risk and earnings management in Chinese context.

Details

International Journal of Emerging Markets, vol. 17 no. 9
Type: Research Article
ISSN: 1746-8809

Keywords

Article
Publication date: 23 March 2012

Lindrianasari and Jogiyanto Hartono

The purpose of this paper is to examine the usefulness of accounting and market information when considering the issue of CEO turnovers in Indonesia.

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Abstract

Purpose

The purpose of this paper is to examine the usefulness of accounting and market information when considering the issue of CEO turnovers in Indonesia.

Design/methodology/approach

The samples used in this research were corporations identified to have undergone (routinely or non‐routinely) top management turnovers (which in this case were President Directors). This study used samples from all corporations that experienced CEO turnover during the period of 1998‐2006 and determined the accounting variables that were thought to explain the turnovers. Corporations that did not experience CEO turnovers throughout the observed period were used as the control group. The final samples for both data sources were decided after considering data availability and confounding effects within the period of observation and were tested by using the LOGIT (separately) model, due to the fact that the dependent variables used were binary variables: 1 for turnover and 0 for no‐turnover.

Findings

The overall results indicated that decreasing accounting and market performance within a company, in an average period of three years, encouraged CEO turnovers.

Research limitations/implications

This paper did not take into account the wider reasons for turnovers, such as CEOs hitting pension age (retirement), death, or forced or voluntary turnovers, all of which in previous research were areas that showed considerable influence. In future research, it would be important to consider those characteristics, along with the personalities of the CEOs who left the firms and those who were brought in.

Practical implications

Owners of firms have to be careful when making decisions to turnover CEOs because the action can generate significant reactions from the market. This market reaction, of course, is the factor that influences the prosperity of the company.

Originality/value

This paper demonstrates that when accounting and market performance is good, the probability that the presiding CEO will not be fired is higher, and vice versa.

Article
Publication date: 5 October 2018

Vinita Ramaswamy

Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the…

Abstract

Purpose

Director interlocks, with their extended resources and shared experiences, have the potential power to go beyond the basic role of providing advice and monitoring the activities of an organization. Interlocked directors can have a cross-cultural role in manipulating corporate choices and strategies in several areas, including capital structure, based on learned behavior in their internal company. Shareholders and creditors are the two main capital providers for a company. However, their risk return horizons are very different, and policies that benefit one group may not be optimal to the other. Interlocks can act as carriers of sub-par practices that affect the behavior of several organizations. Such transactional and relational activities may increase short-term value for equity shareholders, but increase the risk for the creditors. The purpose of this paper is to examine cross-cultural effects of interlocks on corporate strategies that affect this essential agency relationship.

Design/methodology/approach

This paper surveys the extant literature on board interlocks, board practices, equity valuation and credit risk to develop a link between such interlocks and creditor protection. Based on a brief survey of the central concepts of governance and the role of directors, this paper then provides various propositions on the role of interlocking directorships and their effect on the shareholder–creditor agency problem.

Findings

Director interlocks, through their linked common practices, have the potential to increase or worsen shareholder–creditor conflicts by magnifying strategic practices like short-termism, earnings management or through its effects on chief executive officer compensation. Such cross-cultural effects persist across ownership structures and cultural differences in governance.

Research limitations/implications

The paper is not an empirical study of the conflict. This paper uses a literature review to arrive at propositions that may impact shareholder–creditor conflicts.

Practical implications

Several studies have shown cronyism and the dense corporate network has been a large factor in the financial crisis that affected both shareholders and creditors. As the influence of creditors grows with the current availability, and therefore increase in debt levels, this conflict can be magnified through homophily inherent in interlocks. For an organization to be successful in its role of protecting all stakeholders, especially the two major providers of equity capital, factors that cause conflicts must be taken into account while developing the tenets of governance policies and, on a regular basis, during the strategic planning process within the organization. Regulations affecting interlocks, including governance policies, must therefore take into account such influences.

Social implications

Board interlocks act as channels of information between companies, creating a social network where processes and polices are shared and implemented as defined by the concept of homophily. Such management actions reduce both the quality of information available to creditors and their monitoring capabilities. This juxtaposition of shareholder and creditor interest can, therefore, be worsened by director interlocks.

Originality/value

Prior literature has not specifically linked director interlocks and their mutual impact on the culture and strategy of linked corporations to the shareholder–creditor conflict.

Details

Management Decision, vol. 57 no. 10
Type: Research Article
ISSN: 0025-1747

Keywords

Book part
Publication date: 6 November 2012

Zhan Jiang, Kenneth A. Kim and Carl Hsin-Han Shen

Purpose – The relation between research and development (R&D) expenditures and bondholder wealth is examined.Methodology/approach – A sample of firms that increase R&D…

Abstract

Purpose – The relation between research and development (R&D) expenditures and bondholder wealth is examined.

Methodology/approach – A sample of firms that increase R&D expenditures is partitioned into two subsamples: firms with high default risk versus firms with low default risk. For each subsample, we examine the effect of R&D increases on bond returns and default risks.

Findings – For firms with high default risk, R&D increases have a negative impact on bond returns and default risk. Further, there is a wealth transfer from bondholders to stockholders surrounding R&D increases. Neither of these results is found for firms with low default risk.

Research limitations/implications – The present study highlights the importance of assessing firm's existing default risk to understand the effects that R&D expenditures have on bondholders.

Social implications – The study reveals a potential social welfare and economic cost, as it reveals that stockholders may be able to gain wealth at the expense of bondholders.

Originality/value – The study provides important insights to bondholders on how firms’ investment policies, such as R&D expenditures, may affect their wealth.

Details

Advances in Financial Economics
Type: Book
ISBN: 978-1-78052-788-8

Keywords

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