Managerial Short-Termism, Turnover Policy, and the Dynamics of Incentives

Varas, Felipe

doi:10.1093/rfs/hhx088

Cited by 48 publications

(16 citation statements)

References 39 publications

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“…So, how to design an executive compensation contract appears to be especially important. The literature suggests to adopt the form of incentive compatibility constraint (Varas, 2017; Xu et al , 2018). To achieve this, the contracts are often based on accounting data (Watts and Zimmerman, 1999).…”

Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

Zhang

Gao

Zeng

2019

IJAIM

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Purpose The purpose of this paper is to study the relationship between accounting conservatism and executive compensation-performance sensitivity with a view to identify the influence of accounting conservatism on the efficiency of executive compensation contracts. Design/methodology/approach This study uses multiple regression models based on the approach of Iyengar and Zampelli (2010), Clarkson et al. (2011) and Huang and Kisgen (2013) with the data from all of China’s listed non-financial firms over the period of 10 years to test the relationship between accounting conservatism and the sensitivity of executive compensation-performance. Findings This study finds a positive association between executive compensation and accounting-based measure of performance. More importantly, it reveals that conservatism has a positive relation with the executive compensation-performance sensitivity after controlling for a number of firm-specific factors and control variables. This study shows that the sensitivity of executive compensation to firm performance is higher for firms with higher accounting conservatism. Originality/value This is one of the few studies to examine the relationship between accounting conservatism and executive compensation-performance sensitivity. It provides supportive evidence to the argument that accounting conservatism, being an efficient governance mechanism, can help mitigate information risk and moral risk for agency problems.

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Section: Literature Review and Hypothesis Developmentmentioning

confidence: 99%

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

Zhang

Gao

Zeng

2019

IJAIM

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“…A more recent stream of literature studies dynamic contracts under the possibility of manipulation (Edmans et al. (), Varas (), Zhu ()). These studies restrict attention to contracts that prevent manipulation altogether.…”

Section: Related Literaturementioning

confidence: 99%

CEO Horizon, Optimal Pay Duration, and the Escalation of Short‐Termism

Marinović¹,

Varas²

2019

The Journal of Finance

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This paper studies optimal contracts when managers manipulate their performance measure at the expense of firm value. Optimal contracts defer compensation. The manager's incentives vest over time at an increasing rate, and compensation becomes very sensitive to short‐term performance. This generates an endogenous horizon problem whereby managers intensify performance manipulation in their final years in office. Contracts are designed to encourage effort while minimizing the adverse effects of manipulation. We characterize the optimal mix of short‐ and long‐term compensation along the manager's tenure, the optimal vesting period of incentive pay, and the dynamics of short‐termism over the CEO's tenure.

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“…Research that simultaneously addresses the moral hazard and adverse selection problems is scant. For the case of hidden effort and imperfect observability of project quality, Varas (2018) designs an optimal contract that prevents the firm from reducing effort and delivering a low‐quality project. Green and Taylor (2016) study a project with two stages, in which effort and the first stage's status of completion are both privately observed by the agent.…”

Section: Introductionmentioning

confidence: 99%

Dynamic regulation on innovation and adoption of green technology with information asymmetry

Li-song

Chen

Wen

2021

Naval Research Logistics

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This study investigates a regulator's dynamic policy to motivate firms' research on and adoption of green technology. In the proposed model, a firm makes unobservable efforts and can hide the technology's arrival from the regulator to avoid adoption costs. We find that the optimal policy follows a simple structure and induces part‐time efforts, rather than the maximal effort reported in previous studies. In particular, the regulator should offer no subsidy before the arrival of a technology report, provide a one‐time subsidy contingent upon that report, and always set a termination deadline. At the deadline, the firm is forced to select an external option that is associated with social costs. The optimal report‐based subsidy decreases with time. Under the optimal policy, the firm works until an effort deadline, makes no effort thereafter, and reports the technology as soon as it arrives. This study also characterizes the necessary and sufficient conditions under which the optimal policy reduces to one that leads, in terms of throughout time, to effort that is maximal or minimal. Our results indicate that policymakers should implement a policy that compensates firms more in the present and less in the future.

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Managerial Short-Termism, Turnover Policy, and the Dynamics of Incentives

Cited by 48 publications

References 39 publications

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

An empirical study of the relationship between accounting conservatism and executive compensation-performance sensitivity

CEO Horizon, Optimal Pay Duration, and the Escalation of Short‐Termism

Dynamic regulation on innovation and adoption of green technology with information asymmetry

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