Growth through rigidity: An explanation for the rise in CEO pay

Shue, Kelly; Townsend, Richard R.

doi:10.1016/j.jfineco.2016.08.006

Cited by 94 publications

(27 citation statements)

References 51 publications

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“…Our conversations with leading compensation consultants suggest that multiyear plans are used to minimize contracting costs, as option compensation only has to be set once every few years. Hall (, p. 97) argues that firms sort into the two types of plans somewhat arbitrarily, observing that “Boards seem to substitute one plan for another without much analysis or understanding of their differences.” Consistent with this view, Shue and Townsend () find suggestive evidence that boards granted fixed‐number options due to contracting frictions and a lack of sophistication regarding option valuation, rather than because such plans implemented an optimal contract. Nonetheless, we do not assume here that firms choose randomly between plans.…”

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confidence: 96%

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

Shue¹,

Townsend

2017

The Journal of Finance

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101

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We examine how an increase in stock option grants affects CEO risk‐taking. The overall net effect of option grants is theoretically ambiguous for risk‐averse CEOs. To overcome the endogeneity of option grants, we exploit institutional features of multiyear compensation plans, which generate two distinct types of variation in the timing of when large increases in new at‐the‐money options are granted. We find that, given average grant levels during our sample period, a 10% increase in new options granted leads to a 2.8% to 4.2% increase in equity volatility. This increase in risk is driven largely by increased leverage.

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confidence: 96%

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

Shue¹,

Townsend

2017

The Journal of Finance

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101

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“…Another potential concern is that larger option grants may attract more attention from the public and regulators (especially after the option backdating cases), leading to an association between option grants and the likelihood of detection. However, Shue and Townsend () show that, until 2006, the number of stock option grants was quite rigid in that changing conditions did not really change the number of options granted. The last year of our sample period is 2006, so at least during our sample period the number of stock options granted is unlikely to be related to the attention a firm attracts from regulators or others who help detect corporate fraud.…”

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confidence: 99%

CEO Connectedness and Corporate Fraud

Khanna¹,

Kim²,

2015

The Journal of Finance

467

312

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We find that connections CEOs develop with top executives and directors through their appointment decisions increase the risk of corporate fraud. Appointment-based CEO connectedness in executive suites and boardrooms increases the likelihood of committing fraud and decreases the likelihood of detection. Additionally, it decreases the expected costs of fraud by helping conceal fraudulent activity, making CEO dismissal less likely upon discovery, and lowering the coordination costs of carrying out illegal activity. Connections based on network ties through past employment, education, or social organization memberships have insignificant effects on fraud. Appointment-based CEO connectedness warrants attention from regulators, investors, and corporate governance specialists.ALLEGATIONS OF CORPORATE and securities fraud have dominated headlines over the last decade. Corporate wrongdoing damages investor confidence, decreases shareholder value, causes misallocation of capital, and increases financial market instability, leading a number of scholars to examine factors affecting the likelihood of fraud and its detection. 1 Largely absent from these inquiries, however, is an analysis of the role played by the CEO's connections with other * Khanna is at 1203 1204The Journal of Finance R leaders within the firm. 2 CEOs have substantial "soft" influence in addition to explicit legal authority to direct corporate behavior, 3 of which wrongdoing is but one potential outcome. This soft influence is likely to be strengthened by the CEO's internal connections.CEO connections with other top executives and directors could increase or decrease the incidence of corporate fraud. As with other corporate activities, corporate wrongdoing often requires coordination between, or acquiescence by, top executives and/or board members. Such coordination and acquiescence can take the form of direct involvement in criminal activities, or a reluctance to "blow the whistle." A CEO's close connections may facilitate wrongdoing by providing the necessary support. However, CEO connections may also help deter fraud. The CEO's familiarity with other top executives may enable him to detect early signs of fraudulent activity. Further, when a CEO is not aware that a certain activity is illegal, a common problem in some areas of white collar crime, closer interpersonal relationships could make it easier for other executives and board members to help the CEO avoid wrongdoing. Thus, CEO connectedness can cut both ways. Which effect prevails is an empirical question.We consider CEO connectedness to top executives and directors through two sources: appointment decisions and prior network ties. Our results indicate that appointment-based connectedness warrants attention. In particular, it is significantly associated with not only greater likelihood of fraud, but also lower expected costs of engaging in fraud: it decreases the likelihood of fraud detection, lengthens the time from fraud commission to detection, reduces the likelihood of forced CEO turnover upon ...

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“…My second study augments the puzzling literature (Shue and Townsend (2017) My study contributes to the literature on which firms are more likely to disclose. Financial firms,…”

Section: Thesis Overviewmentioning

confidence: 76%

“…My third study contributes to the literature in the three major ways. First, emerging research on compensation suggests that the lack of relative performance evaluation (RPE) is an unresolved and essential puzzle (Shue and Townsend (2017), Murphy (2013), Rajgopol et al (2006), Oyer (2004)).…”

Section: Contributionmentioning

confidence: 99%

“…I contribute to the literature on banker's pay in several ways. The growing research on compensation (Shue and Townsend (2017), Murphy (2013), Rajgopal et al (2006), Oyer (2004)) identifies the lack of relative performance evaluation as an important and unresolved puzzle. I identify that compensation committees considered RPE differently pre and post GFC.…”

Section: Introductionmentioning

confidence: 99%

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Three essays in banking and finance: the effects of the post- global financial crisis prudential regulation on lending, corporate governance practices and shareholder value – evidence from U.S.

Zelenyuk¹

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The goal of this thesis is to investigate the effect of structural changes in the financial environment, which emerged following the Global Financial Crisis, on bank performance. The financial environment has significantly transformed in the post crisis periodnew global regulatory policies have emerged with the purpose of attaining greater world-wide financial stability. These policies have included new macro-prudential tools of selective mandatory capital adequacy disclosures, constraints on bankers' compensation, etc. As a result, an interest in the seminal theoretical works of Grossman (1981), Kyle (1985) and Diamond and Verrecchia (1991) has been rekindled to learn about the informational and broader performance effects of disclosures. The effects of these new tools are apriori ambiguous. New factors can either increase systemic financial stability, or they can bring adverse effects via increased systemic volatility (Tarullo (2010)). In this study, I investigate three key hypotheses. The first hypothesis focuses on the impact of mandatory capital adequacy disclosure on lending. The second hypothesis focuses on the impact of voluntary capital adequacy disclosure on lending. The third hypothesis focuses on the effects of bank-level performance on bankers' compensation. I test these three key hypotheses as well as broader effects with an application of the U.S. financial sector data. I combine empirical strategies of treatment methods (difference-indifference tests, regression discontinuity, matched pairs, etc.) to test my hypotheses. I find that the new regulation had: (a) an adverse effect on lending of the mandatory disclosing banks during the post-disclosure year, (b) fostered voluntary disclosures, that had a positive effect on lending of the voluntary disclosing banks, (c) brought enhancement to the remuneration practices in banks to align them with the shareholders' value and, ultimately, enable implementation of greater financial stability.In particular, in the first study, I contribute to the literature on the real effects of macro-prudential regulation by investigating the (new) link between a mandatory-type of capital adequacy disclosure and bank intermediation. The mandatory disclosure stems from the U.S. Federal Reserve regulation change introduced in 2013 in a harmonized unified framework that applies to top-tier banks with $50 iii billion or more in total assets and leads to the identification of bank intermediation effects using treatment methods. A combined empirical strategy of DiD and regression discontinuity design (RDD) point to the economically significant evidence for the average reduction of both lending growth and deposit growth for banks that disclose their capital adequacy as prescribed by the regulation. This reduction in growth is complemented by profitability and employment effects.In the second study, using a sample relating to the voluntary disclosure by banks in the U.S. in 2014, I show that those banks that provide information on their capital adequacy in excess of the regulator...

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Growth through rigidity: An explanation for the rise in CEO pay

Cited by 94 publications

References 51 publications

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

How Do Quasi‐Random Option Grants Affect CEO Risk‐Taking?

CEO Connectedness and Corporate Fraud

Three essays in banking and finance: the effects of the post- global financial crisis prudential regulation on lending, corporate governance practices and shareholder value – evidence from U.S.

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