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Article

Tom Aabo, Frederik Hoejland and Jesper Pedersen

The purpose of this paper is to investigate the role of narcissistic supply for the association between CEO narcissism and corporate risk taking.

Abstract

Purpose

The purpose of this paper is to investigate the role of narcissistic supply for the association between CEO narcissism and corporate risk taking.

Design/methodology/approach

The authors investigate a sample of 281 non-financial S&P 1500 firms and a corresponding 457 CEOs in the 10-yr period 2006–2015.

Findings

The association between CEO narcissism and corporate risk taking depends on the admiration, attention, and affirmation of own superiority (“narcissistic supply”) that the CEO receives given her/his current position. Thus, a narcissistic CEO with an insufficient narcissistic supply (small firm/small compensation) will crave for more and take more risks (“rock the boat”) while a narcissistic CEO with a sufficient narcissistic supply (large firm/large compensation) will protect the status quo and be reluctant to take new risks. Specifically, the authors find that a change from a slightly narcissistic CEO to a strongly narcissistic CEO, for positions entailing limited (abundant) narcissistic supply, is associated with an increase (a decrease) in corporate risk of 6%–8% (11%–27%).

Originality/value

Previous research indicates a positive association between CEO narcissism and corporate risk taking in specific domains such as M&A and R&D activities. This paper provides a novel contribution to the existing literature by identifying and assessing the important role of narcissistic supply for the association between CEO narcissism and corporate risk taking in general.

Details

Review of Behavioral Finance, vol. ahead-of-print no. ahead-of-print
Type: Research Article
ISSN: 1940-5979

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Article

Winifred D. Scott and Willie E. Gist

The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen…

Abstract

Purpose

The purpose of this study is to explore the effect of industry specialization on the absorption and competitive pricing (or lack thereof) of audits of large Andersen clients (S&P 1500 companies) who switched to the remaining Big 4 international accounting firms in 2002 due to the demise of Arthur Andersen LLP (Andersen). Did the audit clients pay a premium or discount in audit fees to their new auditor who specialized in their industry?

Design/methodology/approach

Ordinary least squares regression is used to test hypothesis of a positive association between industry specialization and audit fees charged to former Andersen's audit clients in 2002 following Andersen's demise. This study provides more control over size effects by design. Test variables are constructed based on national market share of audit fees within an industry. Logistic regression is used to examine the likelihood of choosing new auditor that is an industry specialist.

Findings

Results support hypothesis, consistent with auditor differentiation explanation. Proportion of clients that had engaged an industry specialist in 2001 increased from 38 percent (84 clients) to 48 percent (105 clients) in 2002. No evidence of price‐gouging in 2002 although clients who aligned with industry specialist paid a 23.2 percent premium in audit fees. Large clients lost bargaining power to negotiate lower fees. Findings are robust to the inclusion of additional alternative measures of company size.

Research limitations/implications

Results of logistic regression analysis imply that large audit clients with former auditor of tarnished reputation, long auditor tenure and high leverage are more likely to switch to an industry specialist to possibly signal audit/financial reporting quality. Large sample companies may limit the ability to generalize findings to smaller companies.

Practical implications

Mandatory audit firm rotation (currently being debated in the profession) will have costly effect on the pricing of Big 4 audits for companies wanting to signal audit and financial reporting quality to affect market perception, and large companies would likely lose their ability to bargain for lower audit fees.

Originality/value

The paper focus on the alignment of Andersen clients and impact on audit fees with Big 4 industry specialists resulting from the sudden increase in audit market concentration. Prior to Andersen's collapse, evidence on the association of audit fees premium and industry specialists was mixed, and little attention has been given to the influence of auditor industry specialization on both audit fees and alignment of former Andersen clients with a Big 4 specialist. This paper fills that void.

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Article

Bill Francis, Iftekhar Hasan and Yun Zhu

The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on…

Abstract

Purpose

The purpose of this paper is to examine whether or not the chief executive officers’ (CEO) compensation is affected by the compensation of the outside directors sitting on their board, who are also CEOs of other firms.

Design/methodology/approach

The authors collect CEOs’ and CEO-directors’ compensation data from Execucomp. The authors then match the CEO-directors’ compensation with appointing firms’ CEO compensation and financial statements, from Execucomp and Compustat, respectively. The sample contains 7,561 firm-year observations from 1996 to 2010, with 1,213 distinct S&P 1500 firms and 1,563 distinct CEO-directors. The authors use ordinary least squared method with firm and year fixed effect in most of the analysis.

Findings

With both annual and excess compensation, the authors find strong evidence that CEO-directors’ compensation is related to the compensation of the CEO. Causally, when CEO-director overturns his/her excess compensation from negative to positive, the CEO is more likely to have similar upward change in the following year, while more interestingly, the opposite does not hold. These findings are persistent over time and remain robust to various additional tests.

Research limitations/implications

Due to the data availability, this paper investigates the S&P 1500 public firms.

Originality/value

It is the first work that investigates the link between board members’ external compensation and the CEO’s compensation. This sheds new light on the process of the CEO’s compensation design, in regard to both the information being utilized in the design procedure and the CEO’s influence on his/her own compensation. Second, this paper adds additional evidence to the choice of peer groups in compensation construction. Third, the authors enhance the understanding of the role of CEO-directors. The authors show that CEO-directors may be the ally of CEO, and help in justifying CEO’s compensation, especially when underpaid.

Details

Managerial Finance, vol. 45 no. 7
Type: Research Article
ISSN: 0307-4358

Keywords

Content available
Article

Luis Gomez-Mejia, J. Samuel Baixauli-Soler, Maria Belda-Ruiz and Gregorio Sanchez-Marin

The purpose of this paper is to provide an extension of the behavioral agency model (BAM) by focusing on the moderating role of CEO gender on the relationship between CEO…

Abstract

Purpose

The purpose of this paper is to provide an extension of the behavioral agency model (BAM) by focusing on the moderating role of CEO gender on the relationship between CEO stock options and risk “systematic vs idiosyncratic” and the performance consequences “positive vs negative” of these option incentives.

Design/methodology/approach

Data on CEO’s stock option portfolios are collected from the Standard & Poor’s (S&Ps) ExecuComp. This paper uses a panel data analysis for matched samples of CEOs in S&Ps 1,500 listed firms over the period 2006-2013.

Findings

The results indicate a more conservative, risk-averse posture in the case of female CEOs than for male CEOs when they are compensated with stock options for idiosyncratic (firm-specific) risk. The results also confirm that female CEOs in low systematic risk contexts, although more conservative, take more prudent risks that produce better long-term outcomes as compared to their male counterparts.

Practical implications

Important implications for the design of optimal CEO’s compensation packages emanate from this study. Findings provide useful tools for board of directors to design CEO’s pay packages that take into account the different risk behavior of male and female CEOs with the aim of enhancing firm performance.

Originality/value

This paper provides new evidence within the area of stock option-based compensation by focusing on the distinction between systematic and idiosyncratic risk when the effect of CEO stock option is analyzed and performance implications of awarding options to male and female CEOs.

Objetivo

El objetivo de este trabajo es proporcionar una extensión del modelo comportamental de agencia o Behavioral Agency Model (BAM) centrada en el papel moderador del género del CEO en la relación entre la retribución basada en opciones o stock options y los niveles de riesgo –sistemático e idiosincrático– y en las consecuencias –positivas o negativas– sobre el resultado de la empresa.

Diseño/metodología/aproximación

Los datos sobre stock options de CEOs se recopilan de la base de datos Standard and Poor’s ExecuComp. Este estudio utiliza un análisis de datos de panel para muestras emparejadas de empresas incluidas en S&P 1500 durante el período 2006-2013.

Resultados

Los resultados indican una postura más conservadora de las mujeres CEO en términos de niveles de riesgo idiosincrático en comparación con la llevada a cabo por los CEOs hombres cuando se les retribuye con stock options. Los resultados también confirman que las mujeres CEO en contextos de riesgo sistemático bajo, aunque más conservadoras, asumen riesgos “de mayor calidad” que producen mejores resultados a largo plazo en comparación con sus homólogos masculinos.

Implicaciones prácticas

Importantes implicaciones para el diseño de paquetes de retribución óptimos para el CEO emanan de este estudio. Los resultados mostrados proporcionan herramientas útiles para el Consejo de Administración a la hora de diseñar paquetes de retribución para CEOs. Se deben tener en cuenta los diferentes comportamientos relacionados con la asunción de riesgos de CEOs hombres y mujeres con el objetivo de mejorar el resultado de la empresa.

Originalidad/valor

Esta investigación proporciona nueva evidencia dentro del área de la retribución basada en stock options al centrarse tanto en la distinción de riesgos (sistemático e idiosincrático) como en las implicaciones sobre el resultado de la empresa de las stock options dadas como parte de su retribución a hombres y mujeres que ocupan la posición de CEO.

Palabras clave Modelo comportamental de agencia, Opciones sobre acciones, Género, Riesgo sistemático, Riesgo idiosincrático, Resultado

Tipo de artículo

Artículo de investigación

Objetivo

O objetivo deste artigo é fornecer uma extensão da perspectiva do Modelo de Agência Comportamental (BAM) focada nas opções de ações examinando as influências e consequências do desempenho do CEO, considerando a distinção entre risco sistemático e idiossincrático sobre o efeito das opções de ações. em comportamento de risco.

Design/metodologia/abordagem

Os dados sobre portfólios de opções de ações do CEO são coletados do Standard and Poor’s ExecuComp. Este documento utiliza uma análise de dados em painel para amostras correspondentes de empresas listadas no S&P 1500 no período 2006-2013.

Resultados

Os resultados indicam uma postura mais conservadora, avessa ao risco, no caso de CEOs do sexo feminino do que para CEOs do sexo masculino, quando eles são compensados com opções de ações para o risco idiossincrático (específico da empresa). Os resultados também confirmam que as CEOs do sexo feminino em contextos de baixo risco sistemático, embora mais conservadoras, assumem riscos mais prudentes que produzem melhores resultados a longo prazo, em comparação com os seus homólogos masculinos.

Implicações práticas

Implicações importantes para o projeto de pacotes de remuneração de CEOs ideais emanam deste estudo. Os resultados fornecem ferramentas úteis para o conselho de diretores, a fim de projetar pacotes de remuneração do CEO que levem em conta o comportamento de risco diferente dos CEOs do sexo feminino e masculino, com o objetivo de melhorar o desempenho da empresa.

Originalidade/valor

Este documento fornece novas evidências dentro da área de remuneração baseada em opções de ações, concentrando-se tanto no tipo de risco como determinante do seu efeito de risco quanto nas implicações de desempenho da concessão de opções a CEOs do sexo feminino e masculino.

Palavras-chave Modelo de agência comportamental, Opções de ações, Gênero, risco sistemático, Risco idiossincrático, Atuação

Tipo de artigo

Artigo de pesquisa

Details

Management Research: Journal of the Iberoamerican Academy of Management, vol. 17 no. 1
Type: Research Article
ISSN: 1536-5433

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Article

Shin-Rong Shiah-Hou

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s

Abstract

Purpose

What is the role of analysts in reducing agency problems and information asymmetry between stockholders and managers? The purpose of this paper is to confirm the analyst’s role by examining his or her influence on CEO compensation structure.

Design/methodology/approach

The major population for this study consists of publicly traded corporations of the S & P 1500 for which data on CEO compensation is available from Standard & Poor’s Execucomp database, along with the proxy statements of these firms. Regression analysis is used to test hypotheses about the effect of analyst coverage on CEO compensation.

Findings

The evidence shows that CEOs of firms with greater analyst coverage or higher analyst coverage quality (analyst coverage index) have higher pay-for-performance (Delta), more compensation incentives to increase firm risk (Vega), more total compensation, and more excess compensation. Even after controlling for the effect of other types of corporate governance, including internal governance and institutional holdings, analysts’ activities still have an incremental effect on CEO compensation structure.

Practical implications

The authors findings may be useful to investors who use analyst coverage to evaluate the firm’s CEO compensation, as it suggests that investors may reference the information about analyst coverage of firms to craft appropriate CEO compensation structures.

Originality/value

The authors results contribute by showing that the extra effect of analyst activities on CEO compensation structure exists, even after controlling for other types of governance mechanisms, such as internal governance and institutional investors’ holdings.

Details

Managerial Finance, vol. 42 no. 3
Type: Research Article
ISSN: 0307-4358

Keywords

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Article

Samuel Jebaraj Benjamin and Pallab Biswas

This study aims to examine whether CEO duality affects the association between board gender composition, dividend policy and cost of debt (COD).

Abstract

Purpose

This study aims to examine whether CEO duality affects the association between board gender composition, dividend policy and cost of debt (COD).

Design/methodology/approach

The S&P 1500 firms’ data for this study were collected from the Bloomberg professional service terminal for the period 2010-2015.

Findings

The results show that board gender composition positively impacts both a firm’s propensity to pay dividends and the level of payouts. However, this positive association is only present in firms with CEO duality. The authors find no significant association between board gender composition and COD, but when the authors split the sample into firms with and without CEO duality, the authors find a negative association in firms without CEO duality.

Practical implications

The empirical results highlight important issues for policymakers, managers and investors. The study provides positive feedback on corporate governance rejuvenation efforts that seek to engender and advocate the appointments of female directors to corporate boards. Market participants, such as financial analysts and lenders, could recognize the empirical specifics related to the influence of board gender composition on firms’ dividend policy and COD in the context of CEO duality.

Originality/value

This study fills an important gap in the literature on the relationship between board gender composition and its relation with dividend policy and COD.

Details

Accounting Research Journal, vol. 32 no. 3
Type: Research Article
ISSN: 1030-9616

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Article

Nazli Sila Alan, Katsiaryna Salavei Bardos and Natalya Y. Shelkova

The motivation behind Section 953(b) of Dodd–Frank Act was the increasing pay inequality and supposed CEOs' rent extraction. It required public companies to disclose…

Abstract

Purpose

The motivation behind Section 953(b) of Dodd–Frank Act was the increasing pay inequality and supposed CEOs' rent extraction. It required public companies to disclose CEO-to-employee pay ratios. Using the ratios reported by S&P 1500 firms in 2017–18, this paper examines whether companies led by women and minority CEOs have lower ratios than those led by white male CEOs.

Design/methodology/approach

This paper uses multivariate regression along with a matched sample analysis to examine whether female and minority CEOs have higher CEO-to-employee pay ratios compared to male and white CEOs, controlling for other determinants of pay ratios.

Findings

Results indicate that CEO-to-employee pay ratios are 22–28% higher for female CEOs compared to their male counterparts, controlling for other determinants of pay ratios. There is, however, no statistically significant difference between the pay ratios of minority vs white male CEOs. Minority female CEOs have lower CEO-to-employee pay ratios than white female CEOs. Consistent with literature, larger and more profitable firms have higher CEO-to-employee pay ratios.

Originality/value

While prior studies on determinants of CEO-to-employee pay ratios have used either industry-level or self-reported data for a small subset of firms (resulting in selection bias), this paper uses firm-level data that are available for all S&P 1500 firms due to new disclosure requirements due to the Dodd–Frank Act Section 953(b). Moreover, this is the first paper to test whether gender or ethnicity of a CEO affects within-firm pay inequality.

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Article

Russell Calk, Paul Haensly and Mary Jo Billiot

This study applies a model of systematic belief revision to examine the effect of the relation between current‐period unexpected earnings and prior‐period security returns…

Abstract

This study applies a model of systematic belief revision to examine the effect of the relation between current‐period unexpected earnings and prior‐period security returns on the current period relation between those unexpected earnings and returns. Cross‐sectional analysis blurs the effects of past information on current returns in a manner that makes it easy to overlook any dependence on historical patterns in this information. We show that the market responds to earnings innovations conditional on these patterns but does not respond in the manner predicted by the Hogarth and Einhorn (1992) belief adjustment model. Nonetheless, the results suggest that individual decision processes are detectable in capital markets data.

Details

Accounting Research Journal, vol. 20 no. 1
Type: Research Article
ISSN: 1030-9616

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Article

Gulraze Wakil

This paper aims to examine the relationship between firms’ decisions to expense employee stock options (ESOs) under the voluntary period of Statement of Financial…

Abstract

Purpose

This paper aims to examine the relationship between firms’ decisions to expense employee stock options (ESOs) under the voluntary period of Statement of Financial Accounting Standard No. 123 (SFAS 123) and their market-to-book (MTB-1) ratio and conditional conservatism. Conservatism is chosen because, even though expensing of ESOs is a conservative accounting treatment, it is not obvious how the decision would be related to the MTB-1 ratio and conditional conservatism, particularly because the MTB-1 is a long-run measure of conservatism and the decision to voluntarily expense is examined over two years. The setting provides a unique opportunity to assess how two major proxies of conservatism are related.

Design/methodology/approach

Using firms listed in the S&P 1500 index, firms that expensed ESOs are compared to firms that disclosed only in the financial statements. The main comparison uses a logistic regression.

Findings

During the period when expensing ESOs was voluntary, SFAS 123, the MTB-1 ratio was negatively associated with ESO expense recognition, but conditional conservatism was positively associated with ESO expense recognition. The former is attributed to incentives of conservatism and the latter to the tenet of conservatism tending to reduce income.

Research limitations/implications

The findings add to the literature/controversy on the negative relationship between the MTB-1 ratio and conditional conservatism. More important, they support using more than one measure of conservatism in studies that involve accounting conservatism. A limitation is that the findings are specific to voluntary ESO expense recognition.

Originality/value

This is the first study to examine how conservatism affects the choice to recognize an item on the financial statements or disclosure only. In addition, the study shows that firms were willing to incur real costs from their financial reporting.

Details

Accounting Research Journal, vol. 27 no. 2
Type: Research Article
ISSN: 1030-9616

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Article

Randy Beavers

This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting…

Abstract

Purpose

This paper aims to examine jointly the CEO inside debt and firm debt to further investigate the compensation incentives on risky decision-making and the resulting financial policy decisions concerning the debt structure of the firm.

Design/methodology/approach

Using S&P 1500 data from CRSP, Compustat, Execucomp and Capital IQ between 2006 and 2011, statistical analysis and regression models are used to determine potential correlations between the variable of interest, inside debt and debt control variables, including specialization.

Findings

Firms with high inside debt specialize in commercial loans and drawn credit lines. Larger firms diversify their debt holdings among commercial instruments and senior bonds. As firm size increases with inside debt, the effects are counteracted. Larger firms with high CEO inside debt have lower interest rates on these debt instruments and shorter maturities, suggesting a more conservative financing policy with regards to debt.

Research limitations/implications

Debt diversification is partially affected by compensation in the form of inside debt. Future studies of debt diversification should include CEO compensation controls.

Practical implications

For struggling companies or for those that want to return to a conservative financial policy, they can influence the CEO to make this decision by deferring his compensation to retirement.

Originality/value

This paper considers debt policy through the lens of a key decision maker, the CEO, and uses compensation as an incentive to determine what choices are made concerning debt.

Details

Corporate Governance: The International Journal of Business in Society, vol. 18 no. 4
Type: Research Article
ISSN: 1472-0701

Keywords

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