Insiders and Incentives
Friday, Jan. 4, 2019 8:00 AM - 10:00 AM
- Chair: Camelia M. Kuhnen, University of North Carolina
The Long-Term Consequences of Short-Term Incentives
AbstractThis paper shows that short-term stock price concerns induce CEOs to take value-reducing actions. Vesting equity, our measure of short-term concerns, is positively associated with the probability of a firm repurchasing shares, the amount of shares repurchased, and the probability of the firm announcing a merger or acquisition (M&A). When vesting equity increases, stock returns are more positive in the two quarters surrounding both repurchases and M&A, but more negative in the two years following repurchases and four years following M&A. We show that a potential driver of the negative long-run returns to M&A is subsequent goodwill impairment. These results are inconsistent with CEOs buying underpriced stock or companies to maximize long-run shareholder value, but consistent with these actions being used to boost the short-term stock price and improve the conditions for CEO equity sales. Overall, by identifying actions that carry clear value implications, this paper documents the long-term negative consequences of short-term incentives.
The additional costs of CEO compensation: The effect of relative wealth concerns of employees
AbstractDo employees who compare themselves to the CEO matter for executive compensation? We hypothesize employees who have relative wealth concerns and compare their wage to the CEO's pay. Using German establishment-level wage data, we indeed show that employee wages are increasing in CEO compensation. We use a regulatory shock to the public observability of German CEO compensation and establish causality by using a difference-in-difference approach. Moreover, we control for firm and establishment fixed effects. When CEO compensation increases by 1%, the median employee's wage increases by about 0.04%. Our findings suggest that relative wealth concerns of employees are an important driver of wages and significantly increase the costs of executive compensation.
- G3 - Corporate Finance and Governance