CEO Turnover, Equity-Based Compensation And Firms Investment Decisions

Abstract

This paper examines the impact of the newly appointed CEOs on firms future investment decisions and whether the relation is affected by the equity-based compensation, corporate governance provisions and other CEO characteristics. Using CEO turnover data from 1992-2004, the results show that new CEOs with high options-based compensation, following forced turnover and with shorter organization tenure, are associated with high R&D and advertisement investments. These results are consistent with the managerial incentive effect and the dismissal effect.

You get what you Pay for: The Effect of Top Executives’ Compensation on Advertising and R&D Spending Decisions and Stock Market Return

“…A few other studies do not focus on the effect of compensation but rather on the effects of management style, geographic diversification, and CEO turnover and comment on compensation. Du and Lin (2011) focus on the effects of CEO turnover and show that new CEOs with high options-based compensation following forced turnover and with shorter organizational turnover are associated with higher R&D and advertising investments. Kim and Mathur (2008) focus on the effect of geographical diversification on firm performance and find that geographically diversified firms have higher advertising and R&D expenditures and return on assets than industrially diversified firms.…”

“…Firms with high equity-based compensation are found to be associated with higher firm value than firms with low equity-based compensation. Du and Lin (2011) focus on the effects of CEO turnover and show that new CEOs with high options-based compensation following forced turnover and with shorter organizational turnover 2 Very few studies in this literature focus on marketing or R&D decisions. In contrast, the studies focus on developing agency theory-based arguments related to goal alignment and misalignment (e.g., Lie 2005), informational disclosures by executives on their strategic choices (e.g., Nagar, Nanda, and Wysocki 2003), individual choices (e.g., Rynes, Gerhart, and Parks 2005), risk preference alignment (e.g., Desai and Dharampala 2006), and contextual influences (e.g., Cadenillas, Cvitanic, and Zapatero 2004).…”

“…Firms with high equity-based compensation are found to be associated with higher firm value than firms with low equity-based compensation. Du and Lin (2011) focus on the effects of CEO turnover and show that new CEOs with high options-based compensation following forced turnover and with shorter organizational turnover are associated with higher R&D and advertising investments. Luo, Wieseke, and Homburg (2011) show that change in the proportion of long-term equity-based CEO compensation is associated with a change in action to build firm–customer and firm–employee relationships and customer satisfaction and that customer satisfaction partially mediates the relationship between changes in actions to build firm–customer and firm–employee relationships and firm value.…”

CEO succession and the CEO’s commitment to the status quo

“…Based on the assumption that top managers are crucial to firms' strategic profiles, the literature has shown a close link between CEO succession and the pursuit of strategic change (reviewed by Hutzschenreuter et al 2012). Later studies deepened this finding by focusing on the context of the succession event (Shen and Cannella 2002) and strengthening the result that CEO succession is a meaningful, often change-initiating event for firm strategy (Zhang and Rajagopalan 2010;Barron et al 2011;Du and Lin 2011;Westphal and Fredrickson 2001).…”

Nature of Controlling Stake, Manager Shareholding, and R&D Investment

“…R&D investment is an important drive to improve company innovation ability and competitiveness, however, in modern companies in which the ownership and management are separated, R&D investment may cause the interests conflicts between shareholders (the principals) and managers (the agents) (Du and Lin, 2011) [17], mainly because the R&D investment has high risk profile, hysteretic nature in income and high profitability feature, etc. Firstly, R&D investment is of high risk.…”