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Executive compensation and the corporate spin-off decision

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  • Feng, Yi
  • Nandy, Debarshi K.
  • Tian, Yisong S.

Abstract

We investigate the effect of CEO equity incentives on corporate spin-off decisions and find that CEOs with stronger equity incentives are, ceteris paribus, more likely to engage in corporate spin-offs (after correcting for potential endogeneity concerns). In addition to confirming previous findings that spin-offs are followed by positive announcement and long-run abnormal stock returns, we show that the level of the CEO's incentives matters. In particular, we find that while low incentive firms have a stronger announcement effect, high incentive firms experience better long run stock performance following spin-offs. This is consistent with the disciplining effect of spin-offs since low incentive firms are also found to have more independent boards. While a stronger board may be more influential on key corporate decisions (e.g., spin-offs), better incentive alignment leads to superior long run performance. Our results thus suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary in the long run.

Suggested Citation

  • Feng, Yi & Nandy, Debarshi K. & Tian, Yisong S., 2015. "Executive compensation and the corporate spin-off decision," Journal of Economics and Business, Elsevier, vol. 77(C), pages 94-117.
    • Handle: RePEc:eee:jebusi:v:77:y:2015:i:c:p:94-117
    DOI: 10.1016/j.jeconbus.2014.09.003
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    More about this item

    Keywords

    Executive compensation; Spin-off; Managerial equity incentives; Board independence; Corporate restructuring; Long-term performance;
    All these keywords.

    JEL classification:

    • G34 - Financial Economics - - Corporate Finance and Governance - - - Mergers; Acquisitions; Restructuring; Corporate Governance
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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