Executive pensions, compensation leverage, and firm risk

2018 ◽  
Vol 14 (3) ◽  
pp. 342-361 ◽  
Author(s):  
Reilly White
Keyword(s):  
Executive Compensation ◽  
Default Risk ◽  
Risk Shifting ◽  
Firm Risk ◽  
Content Type ◽  
Inside Debt ◽  
Risk Dynamics ◽  
Data Points ◽  
Significant Extension ◽  
Distance To Default

Purpose The purpose of this paper is to investigate how the structure of both CEO and non-CEO executive compensation affects the overall risk of a firm. The author focuses on the interplay between CEO and non-CEO executive compensation structure. Design/methodology/approach The author uses a hand-collected pension-database that employs both OLS and two-stage least squares regressions to determine the effects of inside debt on default risk using the distance-to-default framework. The database consists of 8,965 executive-year data points from 272 firms. Findings This paper accomplishes three major objectives: first, the author presents a significant extension of Sundaram and Yermack (2007) by including non-CEO executives; the author demonstrates how the differences in inside debt between CEO and non-CEO executives are directly related to firm risk; and that funding these pensions via a Rabbi Trust eliminates most of the risk-shifting effects. Firms with the lowest compensation leverage gap between CEO and non-CEO executives were most likely to observe the agency costs associated with high executive leverage. When compensation leverage structures were substantially different, or the pension was pre-funded, these effects are neutralized. Originality/value To the best of the author’s knowledge, the first paper addresses the effects of Rabbi Trusts on risk-shifting behavior between both CEOs and non-CEO executives. Further, the author extends Sundaram and Yermack (2007) using a hand-collected database six times larger than the original paper. By focusing on the “leverage gap” between CEOs and non-CEO executives, the author presents unique evidence that underlines the risk dynamics between CEOs and their boards.

Banks’ Risk Dynamics and Distance to Default

2019 ◽  
Vol 33 (6) ◽  
pp. 2421-2467 ◽  
Author(s):  
Stefan Nagel ◽  
Amiyatosh Purnanandam
Keyword(s):  
Default Risk ◽  
Structural Models ◽  
Return Volatility ◽  
Usual Assumption ◽  
Asset Volatility ◽  
Risk Dynamics ◽  
Asset Values ◽  
Distance To Default ◽  
Bank Equity ◽  
Risky Debt

Abstract We adapt structural models of default risk to take into account the special nature of bank assets. The usual assumption of lognormally distributed asset values is not appropriate for banks. Typical bank assets are risky debt claims with concave payoffs. Because of the payoff nonlinearity, bank asset volatility rises following negative shocks to borrower asset values. As a result, standard structural models with constant asset volatility can severely understate banks’ default risk in good times when asset values are high. Additionally, bank equity return volatility is much more sensitive to negative shocks to asset values than in standard structural models.

Executive compensation

2017 ◽  
Vol 10 (2) ◽  
pp. 187-205 ◽  
Author(s):  
William Kline ◽  
Masaaki Kotabe ◽  
Robert D. Hamilton ◽  
Steven Balsam
Keyword(s):  
Executive Compensation ◽  
Design Methodology ◽  
Inverse Relationship ◽  
Hierarchical Regression ◽  
Firm Risk ◽  
Executive Pay ◽  
Content Type ◽  
Managerial Efficiency ◽  
Compensation Packages ◽  
Risk Dimensions

Purpose The purpose of this paper is to examine how executive pay schemes influence managerial efficiency, which the authors measure as the risk-adjusted firm performance. Design/methodology/approach The authors utilized hierarchical regression to test the hypotheses. Findings The authors find that as options constitute a higher percentage of total compensation packages, subsequent firm risk-adjusted performance declines. The authors also find an inverse relationship between TMT stock ownership and risk-adjusted performance. Research limitations/implications The findings suggest that the firm stakeholders should reconsider the likely influence of option-based incentives and equity holdings on the risk-adjusted performance. Originality/value Most executive compensation research focuses on either the pay-to-performance or pay-to-risk links. However, in this paper, the authors combine both the performance and risk dimensions simultaneously.

Corporate Payout Policy and CEO‘s Inside Debt Holdings

2015 ◽  
Vol 23 (1) ◽  
pp. 99-123
Author(s):  
Yura Kim ◽  
Jeongsun Yun ◽  
Hyun Woo Choi ◽  
Gyuyoung Hwang
Keyword(s):  
Default Risk ◽  
Payout Policy ◽  
Managerial Compensation ◽  
Defined Benefit ◽  
Firm Risk ◽  
Dividend Payout ◽  
Inside Debt ◽  
Equity Compensation ◽  
Compensation Ratio ◽  
Retirement Funds

Literature documents that executives' inside debt holdings (debt-based managerial compensation) such as defined-benefit pensions and retirement funds are often unfunded and unsecured and have long maturities, and thus provide managerial incentives to pursue strategies to avoid the overall firm risk. This study investigates the effect of managerial inside debt compensation relative to equity-based compensation on a firm's dividend payout policy. We find that a inside debt holdings are positively associated with various measures of a firm's dividend payout policy. Additionally, we find empirical evidence in firms with inside debt holdings that the inverse relationship between high default risk measured by KZ index and dividend payout weakens as the portion of inside debt relative to equity-based compensation rises. This finding indicates that the needs for the firm to restrain dividend payouts to equity holders is reduced as the executive's debt-to-equity compensation ratio becomes larger. Overall, the results suggests the mitigating effect of executives' inside debt holdings on the conflicts between bondholders and shareholders can lead to generous payout policy.

Executive compensation and firm risk: an examination across industries

2018 ◽  
Vol 17 (3) ◽  
pp. 359-382 ◽  
Author(s):  
Stephen Abrokwah ◽  
Justin Hanig ◽  
Marc Schaffer
Keyword(s):  
Financial Crisis ◽  
Executive Compensation ◽  
Risk Taking ◽  
Financial Services ◽  
Firm Risk ◽  
Content Type ◽  
Risk Taking Behavior ◽  
The Impact ◽  
The Relationship

Purpose This paper aims to examine the impact of executive compensation on firm risk-taking behavior, measured by the volatility of stock price returns. Specifically, this analysis explores three hypotheses. First, the impact of short-term and long-term executive compensation packages on firm risk is analyzed to assess whether the packages incentivize risk-taking behavior. Second, the authors test how these compensation and risk relationships were impacted by the financial crisis. Third, they expand the analysis to see if the relationship varies across different industries. Design/methodology/approach The econometric approach used to examine the executive compensation and firm risk relationship takes the form of two different panel model specifications. The first model is a pooled model using the panel data of executive compensation, the firm-level control variables and volatility of stock market returns. The second model highlights the differences in the relationship between executive compensation and riskiness of firm behavior across industries. Findings The authors find a significant and robust relationship, showing that during the post-financial crisis period firms tended to use long-term compensation shares to reduce firm risk. They also find that the relationship between various compensation components and firm risk varies across industries. Specifically, the bonus share of compensation negatively impacted firm risk in the financial services industry, while it positively impacted risk in the transportation, communication, gas, electric and services sectors. Additionally, long-term compensation share exhibits an inverse relationship with firm risk in the financial services, manufacturing and trade industries. Originality/value The conclusions of this paper suggest that there is indeed a relationship between executive compensation and firm risk across industries. There was a notable change in the relationship however between firm risk and long-term compensation following the financial crisis, where firms used long-term compensation to reduce firm riskiness. In other words, the financial crisis changed the nature of this relationship across S&P 1500 firms. The last key finding is that there exist differences in risk and compensation relationships across industries, and these differences across industries are highlighted across both bonus share and long-term incentive share variables. This is the first study to explore this relationship across industries.

The role of CEO inside debt holdings in corporate pension funding status

2015 ◽  
Vol 14 (3) ◽  
pp. 210-238
Author(s):  
Yin Yu-Thompson ◽  
Seong Yeon Cho ◽  
Liang Fu
Keyword(s):  
Least Squares ◽  
Positive Association ◽  
Chief Executive ◽  
Risk Shifting ◽  
Debt Ratio ◽  
Two Stage ◽  
Content Type ◽  
Pension Funding ◽  
Inside Debt ◽  
Two Stage Least Squares

Purpose – The purpose of this study is to examine how pension risk shifting can be explained and constrained by debt component in chief executive officer (CEO) compensation and to explore whether a CEO’s relatively large holdings of inside debt to equity compensation would result in a well-funded pension status. Design/methodology/approach – The authors use two-stage least-squares model to control the potential unobserved and uncontrolled firm characteristics that could drive both CEO inside debt determinants and firm pension funding status. Findings – This paper finds a positive relationship between the CEO inside debt ratio and firm funding status. Additional tests show a positive association between the CEO inside debt ratio and financial slack measures and a negative association between this ratio and financial constraint measure. Additional evidence also shows that the CEO inside debt ratio is negatively associated with other contemporaneous investment activities. Overall, the findings suggest that CEO inside debt creates managerial incentives that can affect pension funding decisions and decrease pension risk shifting. Research limitations/implications – One of the difficulties facing the compensation literature is the unobservable nature of the entire compensation negotiation and design process. Pension funding status is another challenging topic given that management has discretion over the pension assumptions and the calculations themselves are complicated. Therefore, the determinants of pension status used in this paper are not all-inclusive. Although a two-stage least-squares methodology is applied to mitigate endogeneity, it is still possible that an omitted variable problem exists in both cases. Originality/value – This study provides direct evidence of the executive debt-like compensation’s effect on pension risk-shifting behavior and pension funding decisions and also contributes to the literature that investigates the association between CEO inside debt and firm risk by examining the trade-off between pension funding and other contemporaneous investment activities.

CEO inside debt, market competition and corporate risk taking

2019 ◽  
Vol 15 (4) ◽  
pp. 636-657 ◽  
Author(s):  
Shahbaz Sheikh
Keyword(s):  
Risk Taking ◽  
Market Competition ◽  
Ordinary Least Squares ◽  
Negative Association ◽  
Firm Risk ◽  
Content Type ◽  
Inside Debt ◽  
Debt Market ◽  
Practical Tool ◽  
Corporate Risk

Purpose The purpose of this paper is to investigate the effect of market competition on the relation between CEO inside debt and corporate risk-taking. Design/methodology/approach Ordinary least squares regressions are used to estimate the relation between CEO inside debt and firm risk. Additionally, instrumental variable (IV-GMM) regressions are used to check the robustness of the results. Findings The results of this paper indicate that CEO inside debt is negatively associated with the measures of future risk. However, this negative association is influenced by market competition. Specifically, CEO inside debt results in lower levels of firm risk when market competition is high. When market competition is low, inside debt has no effect on firm risk. Additional results show that CEOs with large inside debt tend to decrease R&D investments and financial leverage and increase firm cash holdings and working capital only when market competition is high. Overall, these results suggest that market competition significantly influences the effect of CEO inside debt on corporate risk-taking by changing the strength of incentives from inside debt. Practical implications CEO inside debt could be used to provide incentives to CEOs to manage corporate risk-taking. Social implications The empirical results in this paper provide a practical tool to the boards of corporations to manage corporate risk-taking. The results suggest that boards can reduce excessive risk-taking by increasing the level of debt type compensation incentives. However, this strategy is effective only when market competition is high because in such markets inside debt provides the strongest incentives to reduce corporate risk. When competition is low, incentives from inside debt are ineffective in managing corporate risk-taking. Originality/value This is the first study that shows that the negative association between CEO inside debt and corporate risk-taking critically depends on the intensity of market competition.

Distance-to-default measures and determinants for systemically important financial institutions

2014 ◽  
Vol 22 (2) ◽  
pp. 159-172 ◽  
Author(s):  
Natalya A. Schenck
Keyword(s):  
Financial Institutions ◽  
Default Risk ◽  
Prediction Models ◽  
Risk Measures ◽  
Risk Measure ◽  
Operating Efficiency ◽  
Risk Indicator ◽  
Content Type ◽  
Tier 1 ◽  
Distance To Default

Purpose – This study aims to compare two distance-to-default methods, data-transformed maximum likelihood estimation and “naïve”, that are suitable for financial institutions. The links between these measures and asset size, Tier 1 and Tier 2 capital ratios, non-performing assets and operating efficiency have been examined and an alternative default risk measure has been introduced. Most of the market-based distance-to-default measures are not appropriate for banks due to their unique debt structure. Design/methodology/approach – The author has compared two distance-to-default measures and has identified their accounting determinants using Pearson’s correlation and regressions with clustered standard errors. The sample of the US-based systemically important financial institutions covers the period from 2000 to 2010. Findings – Non-performing assets and operating efficiency are found to be statistically and economically significant determinants of both distance-to-default measures. Tier 1 capital ratio is not a significant indicator of default risk. Practical implications – The results emphasize the importance of using a combination of market-based default risk measures and accounting ratios in default prediction models for the financial institutions. Originality/value – This paper identifies accounting determinants of two distance-to-default measures for large financial institutions, before and during the 2008 financial crisis. It introduces a spread between two measures as an alternative default risk indicator.

The financial consequences of human capital disclosure as part of integrated reporting

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Antonio Salvi ◽  
Nicola Raimo ◽  
Felice Petruzzella ◽  
Filippo Vitolla
Keyword(s):  
Human Capital ◽  
Firm Value ◽  
Fixed Effects ◽  
Cost Of Capital ◽  
Positive Impact ◽  
Firm Risk ◽  
Integrated Reporting ◽  
Content Type ◽  
Financial Consequences ◽  
The Cost

PurposeThe purpose of this paper is to analyse the financial consequences of the level of human capital (HC) information disclosed by firms through integrated reports. Specifically, this work examines the effect of HC information on the cost of capital and firm value.Design/methodology/approachA manual content analysis is used to measure the level of HC information contained in integrated reports. A fixed-effects regression model is used to analyse 375 observations (a balanced panel of 125 firms for the period 2017–2019) and test the financial consequences of HC disclosure.FindingsThe empirical outcomes indicate that HC disclosure has a significant and negative effect on the cost of capital and a positive impact on firm value. Our results show that companies can reduce investors' perceived firm risk by improving HC disclosure, leading to a lower cost of capital. Moreover, our findings support the notion that increased levels of HC disclosure are linked to firms' improved access to external financial resources, consequently enhancing firm value.Originality/valueThis study is the first contribution to examine the financial consequences of HC disclosure and is one of the first to examine the level of HC information within integrated reports.

Are federal single audit reports of internal control weaknesses a useful tool for evaluating management? The case of charter schools

2021 ◽  
Vol ahead-of-print (ahead-of-print) ◽  
Author(s):  
Jean Ryberg Bradley ◽  
Dana A. Forgione ◽  
Joel E. Michalek
Keyword(s):  
Charter Schools ◽  
Executive Compensation ◽  
Internal Control ◽  
Boards Of Directors ◽  
Content Type ◽  
External Stakeholder ◽  
Wide Range ◽  
Internal Control Weaknesses ◽  
Single Audit ◽  
The Relationship

PurposeThe authors examine whether reports of internal control weaknesses (ICWs) under federal single audit (FSA) guidelines are a useful tool for evaluating non-profit (NP) management, using a unique nationwide sample of NP charter schools. While prior research focuses on external stakeholder reactions to reported ICWs, little if any research addresses the utility of these reports for internal users. The authors fill this gap in the literature, finding evidence suggesting that NP charter school decision-makers use internal control (IC) reports when setting executive compensation – awarding lower pay increases when deficiencies are reported.Design/methodology/approachThe authors regress executive compensation changes on reported ICWs and likely determinants of NP compensation, including organization size, growth, liquidity and management performance, using a sample of 173 school/year observations representing 113 unique schools for the years 2012–2015.FindingsThe authors find a negative relationship with executive pay increases subsequent to reports of initial and repeated IC deficiencies, indicating that lower than average pay increases are awarded subsequent to reports of ICWs.Research limitations/implicationsInterpretation of the authors' results is subject to several limitations, including the possibility of omitted variable bias and the authors' sample, though it comprises all available data for the sample period, and is relatively small and may be considered exploratory in nature. Further, charter schools represent a unique public/private partnership in the educational sector, and the results may not be generalizable to other NPs. Future research could explore the relationship between reported IC deficiencies and governance in other, broader NP sectors.Practical implicationsThe authors' findings are useful to NP organization boards of directors as they consider what factors to evaluate in their chief executive officer (CEO) compensation decisions. In addition to other criteria, inclusion of IC effectiveness in the CEO reward system is prudent, especially in today's environment of increasingly important information security and IC matters. The results suggest such information is being included. This previously undocumented use is also of particular value to regulators when weighing the costs and benefits of mandating single audits for smaller NPs, who are otherwise unlikely to obtain information on the organization's IC environment.Social implicationsThese findings may help inform the debate regarding NP charter schools, a fast-growing, economically significant and highly controversial sector in public education. Charters are predominantly funded by state and local taxes. As such, the quality of governance in NP charter schools is of interest to a wide range of stakeholders including parents, regulators and the public at large.Originality/valueWhile prior research on ICWs and NPs focuses on external stakeholder reactions to reported ICWs, little if any research addresses the utility of these reports for internal users, especially in relatively smaller organizations. The research leverages the existence of charter schools, which are independent but present nationwide, providing a suitable sample of like organizations. Further, no extant research to the authors' knowledge examines the relationship of NP executive compensation and reported ICWs – a topic previously addressed in the for-profit (FP) literature.

Angola mounting debt burden raises future default risk

2021 ◽  
Keyword(s):  
World Bank ◽  
Default Risk ◽  
Content Type ◽  
Currency Depreciation ◽  
Debt Burden ◽  
The World Bank ◽  
High Inflation ◽  
African Development Bank ◽  
Central Bank Autonomy ◽  
Domestic Banks

Significance The IMF's willingness to turn a blind eye may enable Angola to retain access to concessional finance over the next 18 months; however, Luanda needs a plan to address deferred principal payments and recapitalise a key escrow account in 2023. Impacts The IMF's latest funding review will unlock USD500mn from the World Bank and USD200mn from the African Development Bank. Persistent IMF pressure for greater central bank autonomy will help curb inflation, which recently reached 25%, pending new legislation. Domestic banks remain vulnerable to economic shocks amid a lengthy recession, persistent high inflation and continued currency depreciation.

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