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Deferred compensation, risk, and company value: investor reactions to CEO incentives

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  • Chenyang Wei
  • David Yermack

Abstract

Many commentators have suggested that companies pay top executives with deferred compensation, a type of incentive known as inside debt. Recent SEC disclosure reforms greatly increased the transparency of deferred compensation. We investigate stockholder and bondholder reactions to companies' initial reports of their CEOs' inside debt positions in early 2007, when new disclosure rules took effect. We find that bond prices rise, equity prices fall, and the volatility of both securities drops upon disclosures by firms whose CEOs have sizable defined benefit pensions or deferred compensation. Similar changes in value occur for credit default swap spreads and exchange-traded options. The results indicate a reduction in firm risk, a transfer of value from equity toward debt, and an overall destruction of enterprise value when a CEO's deferred compensation holdings are large.

Suggested Citation

  • Chenyang Wei & David Yermack, 2010. "Deferred compensation, risk, and company value: investor reactions to CEO incentives," Staff Reports 445, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednsr:445
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    Citations

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    Cited by:

    1. Patrick Bolton & Hamid Mehran & Joel Shapiro, 2015. "Executive Compensation and Risk Taking," Review of Finance, European Finance Association, vol. 19(6), pages 2139-2181.
    2. Eberhard Feess & Ansgar Wohlschlegel, 2018. "Bank capital requirements and mandatory deferral of compensation," Journal of Regulatory Economics, Springer, vol. 53(2), pages 206-242, April.
    3. Hilscher, Jens & Şişli-Ciamarra, Elif, 2013. "Conflicts of interest on corporate boards: The effect of creditor-directors on acquisitions," Journal of Corporate Finance, Elsevier, vol. 19(C), pages 140-158.
    4. Dietmar P.J. Leisen, 2015. "Dynamic risk taking with bonus schemes," Quantitative Finance, Taylor & Francis Journals, vol. 15(9), pages 1583-1596, September.

    More about this item

    Keywords

    Executives - Salaries; Defined benefit pension plans; Chief executive officers; options; Corporations - Finance; Disclosure of information;
    All these keywords.

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