Executive equity incentives and opportunistic manager behavior: new evidence from a quasi-natural experiment

This study provides plausible causal evidence on the effect of executive equity incentives on opportunistic manager behavior. I exploit a unique setting created by the introduction of Financial Accounting Standard (FAS) 123R in 2005, which led to an exogenous increase in the cost of option pay, causing a substantial decline in option pay for some firms while leaving others largely unaffected. Using difference-in-differences analyses with a treatment group of firms that show a decline in option pay and two control groups, I find that the likelihood of a treatment firm meeting or beating analyst forecasts decreases by 14–20%. The results show that the relatively high levels of meet-or-beat before FAS 123R were largely driven by real activities manipulation such as abnormal asset sales and sales manipulation to beat analysts’ benchmarks, while accrual manipulation and analyst management were less relevant. Together, the results suggest that equity incentives encourage opportunistic actions to meet or beat earnings expectations, and a decline in option pay results in a decline in earnings management to meet earnings expectations.

Do Firms Redact Information from Material Contracts to Conceal Bad News?

The Securities and Exchange Commission (SEC) allows firms to redact information from material contracts by submitting confidential treatment requests, if redacted information is not material and would cause competitive harm upon public disclosure. This study examines whether managers use confidential treatment requests to conceal bad news. We show that confidential treatment requests are positively associated with residual short interest, a proxy for managers’ private negative information. This positive association is more pronounced for firms with lower litigation risk, higher executive equity incentives, and lower external monitoring. Confidential treatment requests filed by firms with higher residual short interests are associated with higher stock price crash risk and poorer future performance. Collectively, our results suggest that managers redact information from material contracts to conceal bad news.

An Empirical Study of Equity Incentive on the Stock Valuation of Tobacco Companies

Objectives: Since the China Securities Regulatory Commission (CSRC) issued the Measures for the Administration of Equity Incentives of Listed Companies, the equity incentives of A-share listed companies have become normalized, the discussion of the effect of the implementation of equity incentives on stock valuation can provide a reference for investors whether to choose listed companies with equity incentives for stock valuation. This paper uses python tool to select 30 A-share listed companies that formally started to implement equity incentives in 2018 and the proportion of equity incentives is between 4% and 6% as the sample, and uses cross-sectional data model for empirical analysis. The empirical results show that: first, the implementation of equity incentive in Chinese listed companies has a positive impact on stock valuation, and the impact of equity incentive on stock valuation is significantly better than that before implementation, and the incentive stocks have more investment value; Second, the conclusion is also suitable for Chinese tobacco related companies, which has important reference value for tobacco preference investors.

Contracting with Controllable Risk

We examine how executives' ability to control their firm's exposure to risk affects the design of their incentive-compensation contracts. Our natural experimental evidence shows that exchange-traded weather derivatives allow executives to control their firm's exposure to weather risk. Once these derivatives became available those executives who use them to hedge experience relative reductions in their total compensation and equity incentives. The decline in compensation is consistent with a reduction in the risk premium that executives receive for exposure to weather risk. The decline in equity incentives is consistent with the relation between risk and incentives shifting in a complementary direction when executives can better control their firm's exposure to risk. Collectively, our findings provide evidence that executives' ability to control their firms' exposure, and by extension their own, to an important source of risk influences the design of their incentive-compensation contracts.

Management equity incentives and stock price crash risk: “Golden handcuffs” or “gold watch”

This paper expands the previous research on management equity incentives (MEIs) and stock price crash risk by distinguishing between the "gold watch" region and the "golden handcuff" regions in MEIs. By using an estimation of the gold watch region and the golden handcuff regions based on 6,675 annual observations of China’s A-share listed companies, the stock price crash risk is found to be negatively correlated with MEIs in the golden handcuff regions (0–10%, 30%-100%) and is positively correlated with MEIs in the gold watch region (10%-30%). A further investigation of the mediating effects of peer effects on MEIs and the stock price crash risk reveals that peer effects have a partial mediation effect at the level of peer managers’ shareholding and mediate the relationship between MEIs and the stock price crash risk.

The Role of Convex Equity Incentives in Managers’ Forecasting Decisions

Prior literature suggests that voluntary disclosures of forward-looking information tend to lead to capital market benefits, but these disclosures may also result in negative capital market consequences if subsequent performance falls below expectations. We, therefore, hypothesize that convex equity incentives, which reward managers for stock price gains while limiting their exposure to losses, should promote greater voluntary forward-looking disclosure. Consistent with our hypothesis, we find a significantly positive association between equity incentive convexity and forecast issuance and frequency. We also find that the positive association is more pronounced for firms with higher sales volatility and managers with shorter tenure, in which cases managers are more concerned with missing their own forecasts. Our study suggests that the risks arising from providing voluntary disclosures are important considerations in managers’ disclosure decisions.