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>The role of equity-based plans in managerial compensation schemes: An investigation of CEOs' risky investment decisions and executive turnover.
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The role of equity-based plans in managerial compensation schemes: An investigation of CEOs' risky investment decisions and executive turnover.
This dissertation includes two essays referring to executive equity-based compensation.;The first essay analyzes the relationship between the mix of CEO equity-based compensation, namely stock options and restricted stock, and firms' risky investment. The results show that awarding the CEOs preponderantly with stock options positively affects the firm's level of R&D investment. Conversely, a higher proportion of restricted stock in the CEO's compensation is related to lower investment in (risky) R&D The inverse relation of causality also holds. Firms that make intensive R&D investments are more likely to award their CEOs with more stock options relative to restricted stock. Overall, the results are consistent with the theoretical prediction, in that the managerial compensation scheme plays an important role in determining the level of R&D investment.;The second essay examines the association between executive turnover and equity-based compensation. I investigate whether stock options act to bond executives to their firms and whether retention of managers is a motivation of companies in designing CEO incentive contracts. The results show that stock options do negatively influence the probability of a CEO leaving the company. The monetary cost of losing the value of equity-based compensation package keeps the manager with his company. I also find that in deciding upon a CEO's compensation scheme, firms take into account the probability of a CEO resigning from the company in the next period and award more stock options to reduce the threat of turnover.;The findings also establish that executive retention may be one reason that firms do not filter industry common shocks out of the measures of executive performance. This accords with other studies that found little or no evidence of relative performance evaluation in executive pay.;In general, the results complement prior results in the literature showing that stock options have an important role in managers' retention by testing economic explanations for observed behavior.
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