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Abstract:
We document that firms included in the ExecuComp database tend to be larger, more complex, followed by more analysts, have greater stock liquidity levels, and have higher total, but less concentrated, institutional ownership than other firms. Based on these differences, we test and find support for three predictions. First, ExecuComp firms rely more heavily on earnings and stock returns in determining CEO cash compensation. Second, the weight on earnings is more sensitive to differences in the extent of growth opportunities for ExecuComp firms. Third, the positive relation between institutional ownership concentration and the value of stock option grants is stronger for ExecuComp firms. Overall, our results suggest that ExecuComp and non-ExecuComp firms operate in different contracting environments that lead to differences in the design of their executive compensation contracts. As a result, care should be taken in extending results based on ExecuComp samples to non-ExecuComp firms.

Executive compensation, Stock options, Ownership structure, Institutional investors

Abstract:
This study examines firm performance surrounding insiders' Prepaid Variable Forward (PVF) transactions to infer insiders' information when they enter these off-market contracts. PVFs allow insiders to hedge downside risk, share performance gains, and obtain immediate large-sum cash payments for investment or consumption. On average, PVF transactions cover 30% of a sample insider's firm-specific wealth ($22 million), which is substantially larger than a typical open-market sale. PVFs systematically follow strong firm performance and precede degraded stock and earnings performance. PVFs also precede periods of negative abnormal returns relative to potential alternative investments. The documented association between PVFs and performance declines does not appear to result from the market's response to transaction disclosure, participant self-selection, or general price reversals. Thus, evidence suggests that insiders use PVFs to diversify firm-specific holdings in anticipation of performance declines.

hedge, derivative, management incentives, insider trading, forward sale

Abstract:
We investigate the effects of missing quarterly earnings benchmarks on the CEO's annual bonus. After controlling for the general pay-for-performance relation, we find a significant incremental adverse effect on CEO annual cash bonuses when the firm's quarterly earnings fall short of the consensus analyst forecast or the earnings for the same quarter of the prior year for at least two quarters during the year. However, we find that the relation between the bonus and the number of loss quarters is not significant. Our results suggest that CEO bonus payments provide CEOs with economic incentives to meet quarterly analyst earnings forecasts and earnings from the same quarter of the prior year.

Executive compensation, Quarterly earnings benchmark, Earnings management

Abstract:
We investigate the effects of missing quarterly earnings benchmarks on the CEO's annual bonus. After controlling for the general pay-for-performance relation, we find a significant incremental adverse effect on CEO annual cash bonuses when the firm's quarterly earnings fall short of the consensus analyst forecast or the earnings for the same quarter of the prior year for at least two quarters during the year. However, we find that the relation between the bonus and the number of loss quarters is not significant. Our results suggest that CEO bonus payments provide CEOs with economic incentives to meet quarterly analyst earnings forecasts and earnings from the same quarter of the prior year.

Executive compensation; Quarterly earnings benchmark; Earnings management

Abstract:
We examine the relation between observable indications of a firm's commitment to monitoring financial decisions and reliance on incentive compensation for the Chief Financial Officer (CFO). We find that firms with a finance committee of the board of directors or a CEO who has a financial background tend to use lower levels of incentive-based compensation for their CFOs. Our results are consistent with the joint hypotheses that finance committees and CEOs with financial backgrounds provide stronger monitoring of the CFO's financial decisions, and that the additional monitoring substitutes for CFO contractual incentives to reduce agency costs. We also find evidence consistent with the presence of independent financial experts on the audit committee enhancing the usefulness of accounting earnings as a performance measure in compensating CFOs. Overall, our study provides insight into the determinants of CFO compensation and the role of technical expertise in reducing the firm's agency costs.

Corporate governance, CFO, chief financial officer, compensation, monitoring, financial expertise, equity incentives, finance committee

Abstract:
We investigate whether there are systematic differences in a firm's financial reporting and disclosure policies associated with having a Chief Executive Officer who has previously served as a Chief Financial Officer (i.e., an ex-CFO). We find that firms run by ex-CFOs tend to have more income-decreasing (conservative) accruals and that analysts' forecasts for firms managed by ex-CFOs are more accurate, less dispersed, and less volatile. In addition, firms run by ex-CFOs issue fewer good news earnings forecasts, but the good news forecasts they issue tend to be more precise. We also find similar results when we examine changes in reporting and disclosure policies for firms that appoint CEOs with CFO experience relative to firms that appoint CEOs without such experience. Overall, our evidence is consistent with ex-CFOs utilizing more conservative accounting policies and providing more precise earnings guidance to analysts and suggests that the quality of a firm's financial disclosures is a function of the CEO's financial experience.

CEO, CFO, Disclosure Quality

Abstract:
This paper examines the decision to exercise employee stock options (ESOs). Our results indicate a positive relation between the extent of "early" exercise and the unhedged risk of the option. Specifically we document a positive relation between the variance of ESO returns and the extent of "early" exercise and show that the strength of the relation is reduced by the extent the firm hedges the returns on the ESO. We thus provide empirical evidence of a link between an ESO's expected term and its investment risk to the executive and document that some firms provide a hedge against option risk.

Abstract:
This paper examines the decision to exercise employee stock options (ESOs). Our results indicate a positive relation between the extent of "early" exercise and the unhedged risk of the option. Specifically we document a positive relation between the variance of ESO returns and the extent of "early" exercise and show that the strength of the relation is reduced by the extent the firm hedges the returns on the ESO. We thus provide empirical evidence of a link between an ESO's expected term and its investment risk to the executive and document that some firms provide a hedge against option risk.