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Empirical Compensation and Incentives

Paper Session

Sunday, Jan. 6, 2019 1:00 PM - 3:00 PM

Hilton Atlanta, 209-210-211
Hosted By: American Finance Association
  • Chair: Efraim Benmelech, Northwestern University

Restricting CEO Pay Backfires: Evidence from China

Kee-Hong Bae
,
York University
Zhaoran Gong
,
Hong Kong Polytechnic University
Wilson Tong
,
Hong Kong Polytechnic University

Abstract

Using the pay restriction imposed on CEOs of centrally administered state-owned enterprises (CSOEs) in China in 2009, we study the effects of limiting CEO pay. Compared with firms not subject to the restriction, the CEOs of CSOEs experience a significant pay cut. Pay-performance sensitivity for these firms also significantly decreases. In response to the pay cut, CEOs increase their consumption of perks and siphon off firm resources for their own benefit. Ultimately, the performance of these firms drops significantly following the pay restriction. Our findings suggest that restricting CEO pay distorts CEO incentives and brings unintended consequences. Our findings caution against limiting the pay of CEOs.

Incentives and Competition in the Airline Industry

Rajesh Aggarwal
,
Northeastern University
Carola Schenone
,
University of Virginia

Abstract

We examine how performance changes at airlines in response to a change in executive incentives.
Airlines with executive bonuses contingent on on-time arrival do improve on-time performance.
Competitors on the same routes also improve their on-time performance, even when their executive bonuses are not contingent on on-time performance. We find limited evidence of strategic gaming such as carriers increasing scheduled flight times. Carriers also do not decrease the frequency of flights or the number of passengers to make it easier to be on-time, but they do slightly decrease fares. Our results suggest that incentives heighten competition in on-time performance, consistent with competition in strategic complements.

The Limits of Limited Liability: Evidence from Industrial Pollution

Pat Akey
,
University of Toronto
Ian Appel
,
Boston College

Abstract

We study how parent liability for subsidiary environmental cleanup costs affects industrial pollution and production. Our empirical setting exploits a Supreme Court case that strengthened limited liability protection for parent corporations. Using a difference-in-differences framework, we find that increased liability protection for parents leads to a 10% increase in toxic emissions by subsidiaries. This decision is also associated with abnormal returns of over 1% for parent firms with a relatively high exposure to the change in legal liability. We find evidence that the increase in pollution is driven by lower investment in abatement technologies rather than higher production. Cross-sectional tests suggest a risk-shifting motivation for these effects. Overall, our results highlight moral hazard problems associated with limited liability.

Import Penetration and Executive Compensation

Erik Lie
,
University of Iowa
Keyang Yang
,
University of Iowa

Abstract

We examine the effects of Chinese import penetration on executive compensation of US firms. We find that import penetration reduces executives’ total compensation, stock grants, wealth-performance sensitivity, and opportunistic grant timing, suggesting that competition mitigates agency problems and the need for conventional alignment mechanisms. Furthermore, we find that import penetration increases option grants and option duration, thus incentivizing more innovation and risk-taking.
Discussant(s)
Richard Townsend
,
University of California-San Diego
David Matsa
,
Northwestern University
Filippo Mezzanotti
,
Northwestern University
Shai Bernstein
,
Stanford University
JEL Classifications
  • G3 - Corporate Finance and Governance