We investigate the consequences of increased compensation disclosure transparency on the pay for chief executive officers (CEOs) in firms that are more prone to a misalignment between manager and shareholder interests. Prior research documents that acquiring CEOs’ pay is insensitive to poor post-deal performance after firms complete large acquisitions. Using the 2006 Securities and Exchange Commission (SEC) compensation disclosure regulation as our empirical setting, we find that this result disappears after firms begin to provide more transparent compensation disclosure. Our cross-sectional analyses show that acquiring firms with higher quality compensation disclosure exhibit greater CEO pay sensitivity to poor post-deal performance after 2006. Our findings indicate that increased compensation disclosure transparency helps strengthen the relation between CEO pay and poor performance in acquiring firms.
AlbuquerqueA. M.De FrancoG.VerdiR. S. (2013). Peer choice in CEO compensation. Journal of Financial Economics, 108, 160-181. doi:10.1016/j.jfineco.2012.10.002
2.
ArmstrongC.IttnerC.LarckerD. F. (2012). Corporate governance, compensation consultants, and CEO pay levels. Review of Accounting Studies, 17, 322-351. doi:10.1007/s11142-012-9182-y
3.
BebchukL. A. (2006). Letting shareholders set the rules. Harvard Law Review, 119, 1784-1813.
4.
BebchukL. A.FriedJ. M. (2003). Executive Compensation as an Agency Problem. The Journal of Economic Perspectives, 17, (3), 71-92. Nashville.
5.
BettonS. B.EckboB. E.ThorburnK. S. (2008). Corporate takeovers (SSRN Scholarly Paper ID 1131033). Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=1131033
6.
BiddleG. C.HilaryG.VerdiR. S. (2009). How does financial reporting quality relate to investment efficiency?Journal of Accounting & Economics, 48, 112-131. doi:10.1016/j.jacceco.2009.09.001
7.
BizjakJ.LemmonM.NguyenT. (2011). Are all CEOs above average? An empirical analysis of compensation peer groups and pay design. Journal of Financial Economics, 100, 538-555. doi:10.1016/j.jfineco.2011.02.007
8.
BlissR. T.RosenR. J. (2001). CEO compensation and bank mergers. Journal of Financial Economics, 61, 107-138. doi:10.1016/S0304-405X(01)00057-5
9.
CadmanB.CarterM. E. (2013). Compensation peer groups and their relation with CEO pay. Journal of Management Accounting Research, 26, 57-82. doi:10.2308/jmar-50598
10.
CadmanB.CarterM. E.HillegeistS. (2010). The incentives of compensation consultants and CEO pay. Journal of Accounting & Economics, 49, 263-280.
11.
CarterM. E.LynchL. J.TunaI. (2007). The role of accounting in the design of CEO equity compensation. The Accounting Review, 82, 327-357. doi:10.2308/accr.2007.82.2.327
12.
CoreJ. E.GuayW. R.LarckerD. F. (2008). The power of the pen and executive compensation. Journal of Financial Economics, 88, 1-25. doi:10.1016/j.jfineco.2007.05.001
13.
CoreJ. E.GuayW. R.ThomasR. S. (2005). Is U.S. CEO compensation broken?Journal of Applied Corporate Finance, 17, 97-104. doi:10.1111/j.1745-6622.2005.00063.x
DattaS.Iskandar-DattaM.RamanK. (2001). Executive compensation and corporate acquisition decisions. The Journal of Finance, 56, 2299-2336. doi:10.1111/0022-1082.00406
16.
De FrancoG.HopeO.-K.LarocqueS. (2013). The effect of disclosure on the pay-performance relation. Journal of Accounting and Public Policy, 32, 319-341. doi:10.1016/j.jaccpubpol.2013 .06.007
17.
DonahueS. M. (2008). Executive compensation: The new executive compensation disclosure rules do not result in complete disclosure. Fordham Journal of Corporate & Financial Law, 13, 59-88.
18.
DuchinR.SchmidtB. (2013). Riding the merger wave: Uncertainty, reduced monitoring, and bad acquisitions. Journal of Financial Economics, 107, 69-88. doi:10.1016/j.jfineco.2012.07.003
19.
EdwardsJ. H.EdwardsA. W. F. (1984). Approximating the tetrachoric correlation coefficient. Biometrics, 40, 563.
FaulkenderM.YangJ. (2010). Inside the black box: The role and composition of compensation peer groups. Journal of Financial Economics, 96, 257-270. doi:10.1016/j.jfineco.2010.01.006
22.
FaulkenderM.YangJ. (2013). Is disclosure an effective cleansing mechanism? The dynamics of compensation peer benchmarking. Review of Financial Studies, 26, 806-839. doi:10.1093/rfs/hhs115
23.
GarveyG. T.MilbournT. T. (2006). Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad. Journal of Financial Economics, 82, 197-225.
24.
GongG.LiL. Y.ShinJ. Y. (2011). Relative performance evaluation and related peer groups in executive compensation contracts. The Accounting Review, 86, 1007-1043. doi:10.2308/accr .00000042
25.
GrinsteinY.HribarP. (2004). CEO compensation and incentives: Evidence from M&A bonuses. Journal of Financial Economics, 73, 119-143. doi:10.1016/j.jfineco.2003.06.002
26.
GrinsteinY.WeinbaumD.YehudaN. (2011). The economic consequences of perk disclosure (SSRN Scholarly Paper ID 1108707). Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=1108707
27.
HarfordJ.Humphery-JennerM.PowellR. (2012). The sources of value destruction in acquisitions by entrenched managers. Journal of Financial Economics, 106, 247-261. doi:10.1016/j.jfineco.2012.05.016
28.
HarfordJ.LiK. (2007). Decoupling CEO wealth and firm performance: The case of acquiring CEOs. The Journal of Finance, 62, 917-949. doi:10.1111/j.1540-6261.2007.01227.x
29.
HayesR. M.LemmonM.QiuM. (2012). Stock options and managerial incentives for risk taking: Evidence from FAS 123R. Journal of Financial Economics, 105, 174-190. doi:10.1016/j.jfineco.2012.01.004
30.
HermalinB. E.WeisbachM. S. (1998). Endogenously Chosen Boards of Directors and Their Monitoring of the CEO. The American Economic Review, 88,(1), 96-118.
31.
HermalinB. E.WeisbachM. S. (2012). Information disclosure and corporate governance. Journal of Finance, 67, 195-234. doi:10.1111/j.1540-6261.2011.01710.x
32.
JensenM. C.RubackR. S. (1983). The market for corporate control: The scientific evidence. Journal of Financial Economics, 11, 5-50. doi:10.1016/0304-405X(83)90004-1
33.
KanodiaC.SapraH. (2016). A real effects perspective to accounting measurement and disclosure: Implications and insights for future research. Journal of Accounting Research, 54, 623-676.
LaksmanaI.TietzW.YangY.-W. (2012). Compensation discussion and analysis (CD&A): Readability and management obfuscation. Journal of Accounting & Public Policy, 31, 185-203. doi:10.1016/j.jaccpubpol.2011.08.003
36.
LehavyR.LiF.MerkleyK. (2011). The effect of annual report readability on analyst following and the properties of their earnings forecasts. The Accounting Review, 86, 1087-1115. doi:10.2308/accr.00000043
37.
LehnK. M.ZhaoM. (2006). CEO turnover after acquisitions: Are bad bidders fired?The Journal of Finance, 61, 1759-1811. doi:10.1111/j.1540-6261.2006.00889.x
38.
LeuzC. (2007). Was the Sarbanes–Oxley Act of 2002 really this costly? A discussion of evidence from event returns and going-private decisions. Journal of Accounting & Economics, 44, 146-165. doi:10.1016/j.jacceco.2007.06.001
39.
LeuzC.WysockiP. D. (2016). The economics of disclosure and financial reporting regulation: Evidence and suggestions for future research. Journal of Accounting Research, 54, 525-622. doi:10.1111/1475-679X.12115
40.
LiF. (2008). Annual report readability, current earnings, and earnings persistence. Journal of Accounting & Economics, 45, 221-247. doi:10.1016/j.jacceco.2008.02.003
41.
LoK. (2003). Economic consequences of regulated changes in disclosure: The case of executive compensation. Journal of Accounting & Economics, 35, 285-314. doi:10.1016/S0165-4101(03) 00035-1
42.
LoughranT.McdonaldB. (2014). Measuring readability in financial disclosures. The Journal of Finance, 69, 1643-1671. doi:10.1111/jofi.12162
43.
LoughranT.VijhA. M. (1997). Do long-term shareholders benefit from corporate acquisitions?The Journal of Finance, 52, 1765-1790. doi:10.2307/2329464
44.
MasulisR. W.Fei XieC. W. (2007). Corporate governance and acquirer returns. The Journal of Finance, 62, 1851-1889. doi:10.1111/j.1540-6261.2007.01259.x
McGuireWoods. (2007). A comprehensive analysis of the SEC’s executive compensation disclosure rules. Washington, D.C.
47.
MoellerS. B.SchlingemannF. P.StulzR. M. (2004). Firm size and the gains from acquisitions. Journal of Financial Economics, 73, 201-228. doi:10.1016/j.jfineco.2003.07.002
48.
MorckR.ShleiferR.VishnyR. W. (1990). Do managerial objectives drive bad acquisitions?The Journal of Finance, 45, 31-48. doi:10.1111/j.1540-6261.1990.tb05079.x
49.
MurphyK. J. (2012). Executive compensation: Where we are, and how we got there (SSRN Scholarly Paper ID 2041679). Rochester, NY: Social Science Research Network. Retrieved from http://papers.ssrn.com/abstract=2041679
50.
MurphyK. J.SandinoT. (2010). Executive pay and “independent” compensation consultants. Journal of Accounting & Economics, 49, 247-262. doi:10.1016/j.jacceco.2009.12.001
51.
Nixon Peabody. (2006). SEC adopts amendments to executive compensation disclosure, including new compensation discussion and analysis section. Retrieved from http://www.nixonpeabody.com/117685
52.
PerryT.ZennerM. (2001). Pay for performance? Government regulation and the structure of compensation contracts. Journal of Financial Economics, 62, 453-488. doi:10.1016/S0304-405X(01)00083-6
53.
RobertsM. R.WhitedT. M. (2013). Chapter 7—Endogeneity in empirical corporate finance. In HarrisM.StulzR. M.ConstantinidesG. M. (Eds.), Handbook of the economics of finance (Vol. 2, pp. 493-572). Elsevier B.V.
54.
RobinsonJ. R.XueY.YuY. (2011). Determinants of disclosure noncompliance and the effect of the SEC review: Evidence from the 2006 mandated compensation disclosure regulations. The Accounting Review, 86, 1415-1444. doi:10.2308/accr-10033
55.
ScannellK.LublinJ. S. (2006, July27). SEC issues rules on executive pay, options grants. The Wall Street Journal.
56.
Securities and Exchange Commission. (2006). Executive compensation and related person disclosure (Release Nos. 33-8732A; 34-54302A). Washington, DC: Author.
SkantzT. R. (2012). CEO pay, managerial power, and SFAS 123(R). The Accounting Review, 87, 2151-2179. doi:10.2308/accr-50224
59.
VafeasN.AfxentiouZ. (1998). The association between the SEC’s 1992 compensation disclosure rule and executive compensation policy changes. Journal of Accounting and Public Policy, 17, 27-54. doi:10.1016/S0278-4254(97)10006-0
60.
WhiteM. J. (2013, October). The path forward on disclosure. Presented at the National Association of Corporate Directors—Leadership Conference, National Harbor, MD.
61.
YimS. (2013). The acquisitiveness of youth: CEO age and acquisition behavior. Journal of Financial Economics, 108, 250-273. doi:10.1016/j.jfineco.2012.11.003
Supplementary Material
Please find the following supplemental material available below.
For Open Access articles published under a Creative Commons License, all supplemental material carries the same license as the article it is associated with.
For non-Open Access articles published, all supplemental material carries a non-exclusive license, and permission requests for re-use of supplemental material or any part of supplemental material shall be sent directly to the copyright owner as specified in the copyright notice associated with the article.
