Study with the several resources on Docsity
Earn points by helping other students or get them with a premium plan
Prepare for your exams
Study with the several resources on Docsity
Earn points to download
Earn points by helping other students or get them with a premium plan
The theory of executive compensation through the lens of agency theory, focusing on the tradeoff between risk-sharing and incentives. It discusses the role of stock-based compensation and its impact on long-term value, as well as the challenges of optimal contracting and the potential for managerial rent extraction. The document also touches on the relationship between executive compensation and accounting manipulation.
Typology: Slides
1 / 25
This page cannot be seen from the preview
Don't miss anything!
Executive compensation: optimalExecutive compensation: optimalcontracting or extraction of rents? (2)^ contracting or extraction of rents? (2)
US compensation practice reflects a failure in corporate governance
It is a form of managerial rent extraction:
managers pretend that their pay is performance- based,
through the repricing or reloading of options
ācamouflageā their rent extraction
Corporate Crises of 2001Corporate Crises of 2001
ff.ff.
25 largest bankruptcies in 2001 ā 2002.
Executive pay explosion
52 executives and directors > 10M, 31 > 25M,16 > 50M, 8 >100M.Ken Lay (CEO, Enron), 247 M, Gary Winnick(CEO, Global Crossing), 512M.
Challenge to standard āagencyā view ofexecutive compensation.
Popular view: rent extraction by CEO's.
Need better governance.
Michael Jensen,
executive
compensation ā¢
level
sensitivity
accounting irregularities ā¢otherdisinformation
shareholder class
action litigation
incidence ā¢outturn
company
characteristics
(size, industry,
growth, etc.)
corporate governance
(board structure, insider
holdings, etc.)
Pricedrop
SEC enforcement
actions
earnings
restatements
Compensation and accountingCompensation and accountingchoices/^ choices/
selfdealingselfdealing
Bonus contract incentives drive accountingdecisions
z
Healy (1985), Holthausen
et al
. (1995), Guidry
et al
. (1999)
Equity-based compensation (options) predictsdiscretionary accruals
z
Bergstresser and Philippon (2002), Gao and Shrieves (2002),Peng and Roell (2004), Cheng and Warfield (2003)
Equity-based compensation and option exercisepredicts SEC accounting enforcement actions
z
Johnson
et al.
(2003), Erickson
et al.
(2003)
Compensation and Earnings ManipulationCompensation and Earnings Manipulation[^ [
PengPeng
RoellRoell
2003]2003]
Coef.
t-stats
constant
Number of obs
R-squared
Accounting manipulation andAccounting manipulation andprivate securities litigationprivate securities litigation
Johnson
et al. (2002)
z
aggressive accounting
ā
litigation (post-PSLRA 1995)
Lu (2003)
z
earnings management
ā
litigation
DuCharme
et al. (2003)
z
abnormal accruals in IPOs/SEOs
ā
litigation
Heninger (2001)
z
+ve abnormal accruals
ā
lawsuits against
f
i
rm auditors
Compensation and litigationCompensation and litigation[Peng[
Peng-
-Roell
Roell 2003]
2003]
**
**
2
Recent legal reforms discourageRecent legal reforms discouragesecurities class action litigation^ securities class action litigation
1998 securities class actions to be brought only in Federalcourts
Curtails jurisdiction shopping
1995 Private Securities Litigation Reform Act
Discourages frivolous litigation
e.g.
reduced liability for unknowing parties (outside directors),
limits on attorneyās fees, shift of defendantās legal fees toplaintiff if suit is baseless, lead plaintiff requirements
1994 Supreme Court decision
Curtails liability of āaiders and abettorsā
1991 statute of limitations (1 year from discovery, 3years from offense)
Responses to SarbanesResponses to Sarbanes
OxleyOxley
((
ProtiviProtivi
survey)survey)
New procedures governing external auditorās non-audit services: 72%
Board and board committee changes (membership and/or charter): 40%
Internal audit department
