IDEAS home Printed from https://ideas.repec.org/a/eee/empfin/v70y2023icp62-73.html
   My bibliography  Save this article

Spillover effects in managerial compensation

Author

Listed:
  • Kieschnick, Robert
  • Shi, Wenyun

Abstract

Prior evidence on how executive compensation influences managerial incentives to take risks in shareholder’s interest ignores potential spillover effects, even though there is evidence that compensation in one firm affects the compensation in other firms. We address this issue in a way that considers a broader view of corporate networks. Specifically, we examine the effects of a tax law change that induced a change in the vega of CEO compensation. We find that this change is associated with a larger increase in the vegas of directly affected CEOs than would be estimated without considering spillover effects. Moreover, we find evidence for the diffusion of these changes to other firms within their industry. Further, this diffusion is greater the more affected firms within an industry. And finally, we find that these changes are associated with increases in the asset volatility of both treated and untreated firms.

Suggested Citation

  • Kieschnick, Robert & Shi, Wenyun, 2023. "Spillover effects in managerial compensation," Journal of Empirical Finance, Elsevier, vol. 70(C), pages 62-73.
    • Handle: RePEc:eee:empfin:v:70:y:2023:i:c:p:62-73
    DOI: 10.1016/j.jempfin.2022.11.002
    as

    Download full text from publisher

    File URL: http://www.sciencedirect.com/science/article/pii/S0927539822000998
    Download Restriction: Full text for ScienceDirect subscribers only
    File URL: https://libkey.io/10.1016/j.jempfin.2022.11.002?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    References listed on IDEAS

    as
    1. Alex Edmans & Xavier Gabaix & Dirk Jenter, 2017. "Executive Compensation: A Survey of Theory and Evidence," NBER Working Papers 23596, National Bureau of Economic Research, Inc.
    2. Yakov Amihud & Baruch Lev, 1981. "Risk Reduction as a Managerial Motive for Conglomerate Mergers," Bell Journal of Economics, The RAND Corporation, vol. 12(2), pages 605-617, Autumn.
    3. Albuquerque, Ana M. & De Franco, Gus & Verdi, Rodrigo S., 2013. "Peer choice in CEO compensation," Journal of Financial Economics, Elsevier, vol. 108(1), pages 160-181.
    4. Jensen, Michael C. & Meckling, William H., 1976. "Theory of the firm: Managerial behavior, agency costs and ownership structure," Journal of Financial Economics, Elsevier, vol. 3(4), pages 305-360, October.
    5. Bizjak, John & Lemmon, Michael & Nguyen, Thanh, 2011. "Are all CEOs above average? An empirical analysis of compensation peer groups and pay design," Journal of Financial Economics, Elsevier, vol. 100(3), pages 538-555, June.
    6. Fama, Eugene F. & French, Kenneth R., 1997. "Industry costs of equity," Journal of Financial Economics, Elsevier, vol. 43(2), pages 153-193, February.
    7. Gande, Amar & Kalpathy, Swaminathan, 2017. "CEO compensation and risk-taking at financial firms: Evidence from U.S. federal loan assistance," Journal of Corporate Finance, Elsevier, vol. 47(C), pages 131-150.
    8. Chesney, Marc & Stromberg, Jacob & Wagner, Alexander F. & Wolff, Vincent, 2020. "Managerial incentives to take asset risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    9. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 79-101.
    10. Lewellen, Katharina, 2006. "Financing decisions when managers are risk averse," Journal of Financial Economics, Elsevier, vol. 82(3), pages 551-589, December.
    11. Armstrong, Christopher S. & Vashishtha, Rahul, 2012. "Executive stock options, differential risk-taking incentives, and firm value," Journal of Financial Economics, Elsevier, vol. 104(1), pages 70-88.
    12. Merton, Robert C, 1974. "On the Pricing of Corporate Debt: The Risk Structure of Interest Rates," Journal of Finance, American Finance Association, vol. 29(2), pages 449-470, May.
    13. Low, Angie, 2009. "Managerial risk-taking behavior and equity-based compensation," Journal of Financial Economics, Elsevier, vol. 92(3), pages 470-490, June.
    14. Alex Edmans & Xavier Gabaix, 2016. "Executive Compensation: A Modern Primer," Journal of Economic Literature, American Economic Association, vol. 54(4), pages 1232-1287, December.
    15. John Core & Wayne Guay, 2002. "Estimating the Value of Employee Stock Option Portfolios and Their Sensitivities to Price and Volatility," Journal of Accounting Research, Wiley Blackwell, vol. 40(3), pages 613-630, June.
    16. Berg, Tobias & Reisinger, Markus & Streitz, Daniel, 2021. "Spillover effects in empirical corporate finance," Journal of Financial Economics, Elsevier, vol. 142(3), pages 1109-1127.
    17. Coles, Jeffrey L. & Daniel, Naveen D. & Naveen, Lalitha, 2006. "Managerial incentives and risk-taking," Journal of Financial Economics, Elsevier, vol. 79(2), pages 431-468, February.
    18. repec:bla:jfinan:v:59:y:2004:i:1:p:207-225 is not listed on IDEAS
    19. Black, Fischer & Scholes, Myron S, 1973. "The Pricing of Options and Corporate Liabilities," Journal of Political Economy, University of Chicago Press, vol. 81(3), pages 637-654, May-June.
    20. repec:bla:jfinan:v:59:y:2004:i:2:p:831-868 is not listed on IDEAS
    21. Onur Kemal Tosun, 2016. "The Effect of CEO Option Compensation on the Capital Structure: A Natural Experiment," Financial Management, Financial Management Association International, vol. 45(4), pages 953-979, December.
    22. Paul Brockman & Xiumin Martin & Emre Unlu, 2010. "Executive Compensation and the Maturity Structure of Corporate Debt," Journal of Finance, American Finance Association, vol. 65(3), pages 1123-1161, June.
    23. Hagendorff, Jens & Vallascas, Francesco, 2011. "CEO pay incentives and risk-taking: Evidence from bank acquisitions," Journal of Corporate Finance, Elsevier, vol. 17(4), pages 1078-1095, September.
    24. Hayes, Rachel M. & Lemmon, Michael & Qiu, Mingming, 2012. "Stock options and managerial incentives for risk taking: Evidence from FAS 123R," Journal of Financial Economics, Elsevier, vol. 105(1), pages 174-190.
    25. Diane K Denis & Torsten Jochem & Anjana Rajamani & Wei Jiang, 2020. "Shareholder Governance and CEO Compensation: The Peer Effects of Say on Pay," The Review of Financial Studies, Society for Financial Studies, vol. 33(7), pages 3130-3173.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Hong, Jieying, 2019. "Managerial compensation incentives and corporate debt maturity: Evidence from FAS 123R," Journal of Corporate Finance, Elsevier, vol. 56(C), pages 388-414.
    2. Chesney, Marc & Stromberg, Jacob & Wagner, Alexander F. & Wolff, Vincent, 2020. "Managerial incentives to take asset risk," Journal of Corporate Finance, Elsevier, vol. 65(C).
    3. Mazur, Mieszko & Salganik-Shoshan, Galla, 2019. "The effect of executive stock option delta and vega on the spin-off decision," The Quarterly Review of Economics and Finance, Elsevier, vol. 72(C), pages 132-144.
    4. J. Samuel Baixauli-Soler & Maria Belda-Ruiz & Gregorio Sanchez-Marin, 2017. "An executive hierarchy analysis of stock options: Does gender matter?," Review of Managerial Science, Springer, vol. 11(4), pages 737-766, October.
    5. Hyungshin Park & Dimitris Vrettos, 2015. "The Moderating Effect of Relative Performance Evaluation on the Risk Incentive Properties of Executives’ Equity Portfolios," Journal of Accounting Research, Wiley Blackwell, vol. 53(5), pages 1055-1108, December.
    6. Dunbar, Craig & Li, Zhichuan (Frank) & Shi, Yaqi, 2020. "CEO risk-taking incentives and corporate social responsibility," Journal of Corporate Finance, Elsevier, vol. 64(C).
    7. David Aboody & Shai Levi & Dan Weiss, 2018. "Managerial incentives, options, and cost-structure choices," Review of Accounting Studies, Springer, vol. 23(2), pages 422-451, June.
    8. Castro, Paula & Keasey, Kevin & Amor-Tapia, Borja & Tascon, Maria T. & Vallascas, Francesco, 2020. "Does debt concentration depend on the risk-taking incentives in CEO compensation?," Journal of Corporate Finance, Elsevier, vol. 64(C).
    9. Baixauli-Soler, J. Samuel & Belda-Ruiz, Maria & Sanchez-Marin, Gregorio, 2015. "Executive stock options, gender diversity in the top management team, and firm risk taking," Journal of Business Research, Elsevier, vol. 68(2), pages 451-463.
    10. Liu, Claire & Masulis, Ronald W. & Stanfield, Jared, 2021. "Why CEO option compensation can be a bad option for shareholders: Evidence from major customer relationships," Journal of Financial Economics, Elsevier, vol. 142(1), pages 453-481.
    11. Randall A. Heron & Erik Lie, 2017. "Do Stock Options Overcome Managerial Risk Aversion? Evidence from Exercises of Executive Stock Options," Management Science, INFORMS, vol. 63(9), pages 3057-3071, September.
    12. Jing Zhang & Jieun Chung, 2018. "Does geographical location matter for managerial compensation design?," Journal of Economics and Finance, Springer;Academy of Economics and Finance, vol. 42(1), pages 1-32, January.
    13. Croci, Ettore & Petmezas, Dimitris, 2015. "Do risk-taking incentives induce CEOs to invest? Evidence from acquisitions," Journal of Corporate Finance, Elsevier, vol. 32(C), pages 1-23.
    14. Chakraborty, Atreya & Gao, Lucia Silva & Sheikh, Shahbaz, 2019. "Managerial risk taking incentives, corporate social responsibility and firm risk," Journal of Economics and Business, Elsevier, vol. 101(C), pages 58-72.
    15. Chengru Hu & Wei Jiang, 2019. "Managerial risk incentives and accounting conservatism," Review of Quantitative Finance and Accounting, Springer, vol. 52(3), pages 781-813, April.
    16. Yoon K. Choi & Seung Hun Han & Seongjae Mun, 2021. "The nonlinear relation between financing decisions and option compensation," Review of Quantitative Finance and Accounting, Springer, vol. 56(4), pages 1343-1356, May.
    17. Gormley, Todd A. & Matsa, David A. & Milbourn, Todd, 2013. "CEO compensation and corporate risk: Evidence from a natural experiment," Journal of Accounting and Economics, Elsevier, vol. 56(2), pages 79-101.
    18. Timmermans, Oscar, 2024. "Cash versus share payouts in relative performance plans," LSE Research Online Documents on Economics 123696, London School of Economics and Political Science, LSE Library.
    19. Ellul, Andrew & WANG, Cong & Zhang, Kuo, 2016. "Labor Unemployment Risk and CEO Incentive Compensation," CEPR Discussion Papers 11634, C.E.P.R. Discussion Papers.
    20. Joshua D. Anderson & John E. Core, 2018. "Managerial Incentives to Increase Risk Provided by Debt, Stock, and Options," Management Science, INFORMS, vol. 64(9), pages 4408-4432, September.

    More about this item

    Keywords

    Spillover effects; Equity incentives; Vega; Risk-taking; Asset volatility effects;
    All these keywords.

    JEL classification:

    • G3 - Financial Economics - - Corporate Finance and Governance
    • G38 - Financial Economics - - Corporate Finance and Governance - - - Government Policy and Regulation
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:eee:empfin:v:70:y:2023:i:c:p:62-73. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Catherine Liu (email available below). General contact details of provider: http://www.elsevier.com/locate/jempfin .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.