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Abstract:
We examine whether compensation consultants' potential cross-selling incentives explain more lucrative CEO pay packages using 755 firms from the S&P 1500 for 2006. Critics allege that these incentives lead consultants to bias their advice to secure greater revenues from their clients (Waxman, 2007). Among firms that retain consultants, we are unable to find widespread evidence of higher levels of pay or lower pay-performance sensitivities for clients of consultants with potentially greater conflicts of interest. Overall, we do not find evidence suggesting that potential conflicts of interest between the firm and its consultant are a primary driver of excessive CEO pay.

Executive Compensation, Compensation Consultants

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 investigates the relation between audit quality, auditor industry market share, and audit fees. Prior literature has asserted that audit providers with high market shares can be designated as industry specialists and that the fee premiums that sometimes attach to these auditors is evidence of a quality differentiated audit product. Using data from the U.S. audit market for the fiscal year 2003 we extend this literature by investigating the relationships among audit fee premiums, auditor market shares, and two dimensions of audit quality: external reporting and economies of scope in providing joint audit and non-audit services. We find little evidence to support the conjecture that high market share auditors provide increased audit quality. Further, we find that most auditors with high market shares do not seem to charge a fee premium. To the contrary, we report that the high market share fee premiums found in pooled (across industry) tests are primarily attributable to a small set of industries in which the high market share (specialist) auditor has a dominant position. This leads us to conclude that the available evidence is more supportive of the hypothesis that high-market share firms are extracting rents than the hypothesis that these auditors are providing a quality differentiated product.

auditor specialization, discretionary accruals, earnings quality, auditor technology

Abstract:
This study examines vesting features of compensation contracts that influence the decision horizon of managers (i.e. horizon incentives) and sheds light on the role investor horizon plays in the design of these incentives. We use VCs as our proxy for short horizon controlling investors around the IPO because VCs typically exit successful investments through an IPO. We find that VCs align the CEO’s incentives with their own shorter investment horizon when the investor base is largely uninformed. But, when faced with informed investors, horizon incentives lengthen. We also document a positive relation between long-run abnormal stock returns and horizon incentives.

Executive Incentives, Venture Capital, Governance, Stock Options

Abstract:
This paper empirically investigates the influence of executive wealth diversification on firm equity granting patterns. Risk-averse, undiversified executives that hold substantial amounts of wealth in the firm, discount the value of their equity holdings, which increases costly risk-sharing and reduces incentives provided by equity grants. When executives divest equity from the firm, they insulate their wealth from firm-specific risk, thereby reducing costly risk-sharing and increasing the incentives of equity grants. This study investigates how firms respond to increases in executive wealth diversification that result from equity divestitures. The findings suggest that firms do not fully replenish divested incentives, but target greater equity incentives following an increase in executive wealth diversification. In addition, firms appear to increase the proportion of annual compensation in the form of equity after controlling for grants in response to deviations from equilibrium incentives. Overall, the results support agency theory predictions that wealth diversification is an important component of optimal contracting with undiversified, risk-averse managers.

Contracting, Managerial compensation, Managerial ownership, Equity incentives