• Selected
• Entire List

Abstract:
We examine the various methods by which shareholders have tried to influence executive compensation. We then attempt to determine whether one of the most popular methods for individual investors, shareholder proposals using Rule 14a-8, has had any impact on the level and composition of CEO's compensation at target companies. We use data for the 1993-1997 proxy seasons on 168 executive compensation proposals submitted to 145 different companies to determine how shareholders have chosen their target companies and whether these companies' boards have responded to investors' proposals by reducing CEO pay levels or shifting the composition of their pay packages.

Our analysis yields several interesting results. We find that shareholders generally target their proposals at relatively poorly performing companies exhibiting higher levels of executive compensation than other similar-sized firms in their industry. This is consistent with the claim that shareholder proposals are being used in an attempt to monitor excessive levels of executive compensation. We also find that shareholders are statistically more likely to support executive compensation proposals that attempt to restrict executive compensation than they are proposals that simply ask for more disclosure about executive compensation. Similarly, we find that shareholders are statistically more likely to support executive compensation proposals that raise corporate governance issues rather than those that raise social responsibility issues.

Shareholder proposals concerning executive compensation may affect the level and composition of CEO compensation. We find that target companies do not increase average total CEO compensation levels as rapidly in the year after receiving a shareholder proposal as firms not receiving such proposals. In addition, we employ regression analysis to determine whether executive compensation levels at companies receiving shareholder proposals are affected by factors such as the level of voting support for the initiative, the type of sponsor of the proposal, and the nature of the proposal related to the proposal. We find some support for the hypothesis that higher levels of voting support for proposals are associated with smaller increases in CEO compensation at companies receiving proposals when compared to CEO pay levels at similar-sized companies in the same industry. These results are consistent with the hypothesis that boards of directors are responsive to shareholders' expressions of dissatisfaction with their firms' executive compensation pay packages, especially when they are raised as corporate governance issues.

Abstract:
We examine the various methods by which shareholders have tried to influence executive compensation. We then attempt to determine whether one of the most popular methods for individual investors, shareholder proposals using Rule 14a-8, has had any impact on the level and composition of CEO's compensation at target companies. We use data for the 1993-1997 proxy seasons on 168 executive compensation proposals submitted to 145 different companies to determine how shareholders have chosen their target companies and whether these companies' boards have responded to investors' proposals by reducing CEO pay levels or shifting the composition of their pay packages.

Our analysis yields several interesting results. We find that shareholders generally target their proposals at relatively poorly performing companies exhibiting higher levels of executive compensation than other similar-sized firms in their industry. This is consistent with the claim that shareholder proposals are being used in an attempt to monitor excessive levels of executive compensation. We also find that shareholders are statistically more likely to support executive compensation proposals that attempt to restrict executive compensation than they are proposals that simply ask for more disclosure about executive compensation. Similarly, we find that shareholders are statistically more likely to support executive compensation proposals that raise corporate governance issues rather than those that raise social responsibility issues.

Shareholder proposals concerning executive compensation may affect the level and composition of CEO compensation. We find that target companies do not increase average total CEO compensation levels as rapidly in the year after receiving a shareholder proposal as firms not receiving such proposals. In addition, we employ regression analysis to determine whether executive compensation levels at companies receiving shareholder proposals are affected by factors such as the level of voting support for the initiative, the type of sponsor of the proposal, and the nature of the proposal related to the proposal. We find some support for the hypothesis that higher levels of voting support for proposals are associated with smaller increases in CEO compensation at companies receiving proposals when compared to CEO pay levels at similar-sized companies in the same industry. These results are consistent with the hypothesis that boards of directors are responsive to shareholders' expressions of dissatisfaction with their firms' executive compensation pay packages, especially when they are raised as corporate governance issues.

Abstract:
Early studies of market reaction to stock option plans have found positive increases in stock prices upon the announcement of these plans. However, since in the mid-1990's, shareholders have become increasingly critical of stock option plans, and voted against them in growing numbers. Are shareholders fed up with the continued growth in option compensation, and if so, what are boards of directors doing in response to these concerns?

In this paper, we use data from the 1998 proxy season to reevaluate market reaction to management-sponsored proposals for stock option plans, the level of shareholder opposition to these plans, and the effect of this opposition on corporate boards' awards of CEO compensation in subsequent years. In the first half of the paper, we conduct an event study similar to those done for early stock option plans from the 1980's and early 1990's. However, we expect to find that the market will react differently to plans that exhibit the high levels of potential dilution of shareholder ownership and certain "shareholder unfriendly" aspects of the plans that make shareholders more likely to vote against such plans. Our findings support part of our hypothesis: we find that higher levels of potential dilution in executive-only plans result in significantly negative cumulative market adjusted returns in the 3-day period surrounding the proxy date, but that plans that include repricing provisions, permit executives to borrow money from the firm in order to exercise options, or that allow the issuance of restricted stock, do not experience significantly negative returns.

In the second part of the paper, we present evidence regarding the factors that affect shareholder voting opposition to stock option plans and the impact of this opposition on subsequent CEO compensation. In cross-sectional regressions, we find a significantly negative relationship between the percentage vote against the option proposal and the percentage change in salary and in total pay from the 1999 to 1998 compensation years. We interpret this finding to support the idea that boards of directors respond to shareholder concerns about CEO option awards by reducing executive pay in the year after a high level of shareholder opposition.

Abstract:
Over the past decade, executive compensation has become a controversial topic. Increasingly, corporate boards of directors are confronted by angry shareholder groups over the size and composition of executive pay packages. One of the most important focal points for these tensions arises when shareholders are asked by the board to approve the creation of new stock option plans, or the amendment of existing plans. This article seeks to identify the factors that lead shareholders to support or oppose stock option plans. We examine the justifications for the widespread use of stock options and identify several benefits from stock option plans as well as some of the criticisms leveled against the methods that boards have used to implement the plans.

In addition, we conduct an empirical analysis of the determinants of shareholder voting on stock option plans in the 1998 proxy season. We examine the four companies in our sample in which shareholders defeated the plans and then perform a cross-sectional analysis of voting results on the entire sample of 637 proposals. Our principal finding is that while shareholders generally vote to approve stock option plans, shareholders are particularly sensitive to the potential dilution caused by the plans, whether that dilution is in terms of total company dilution or individual plan dilution. In addition, we find that several characteristics of the plans, such as option repricing, payments in restricted stock, and the provision of loans to executives for the purchase of shares appear to be the most significant factors leading to increased shareholder opposition.

Abstract:
This paper is an empirical analysis of plaintiffs' success rates in executive compensation litigation. Using data from publicly available files, this study examines a sample of 124 cases where shareholders have challenged executive compensation levels and practices at public and closely held corporations. This data set shows that shareholders are successful in at least some stage of this litigation in a significant percentage of these cases.

Our most robust result is that plaintiffs win a greater percentage of the time in compensation cases against closely held companies than against publicly held companies. This result is consistent for every stage of these cases - motions to dismiss, motions for summary judgment, trial and appeal. We also find that, on average, plaintiffs fare better in compensation cases in courtrooms outside of Delaware than in Delaware. However, once we control for the different composition of the Delaware Courts' caseload, these differences disappear and the overall success rates in executive compensation litigation are surprisingly similar.

When we look at the procedural and substantive claims being made in the cases, we find some other interesting results. Demand futility is a significant barrier to getting such suits off the ground. Plaintiffs lose on a motion to dismiss for failure to make demand about half the time. In Delaware, motions to dismiss for failure to make demand are much more frequently raised since the Delaware Supreme Court's decisions in Aronson v. Lewis, although plaintiffs today seem to succeed in overcoming them a greater percentage of the time.

The picture is more complicated with respect to the substantive claims made in these cases. Plaintiffs average about 30% success in maintaining duty of care claims at the various stages of these suits with slightly higher success rates in non-Delaware cases. However, since the Delaware Supreme Court's decision in Smith v. Van Gorkom, the number of these claims has increased and their likelihood of success at least at some stage of the litigation appears to have increased. With waste claims, plaintiffs succeed about 40% of the time, while for duty of loyalty claims, they win about 35% of the time. Plaintiffs are consistently more successful at close corporations than at public corporations for both types of claims.

Abstract:
In this paper, we ask whether CEOs bargain to include binding arbitration provisions in their employment contracts. After exploring the theoretical arguments for and against including such provisions in these agreements, we use a large sample of CEO employment contracts to test the several different hypotheses for including such provisions. We find that only about one half of CEO employment contracts in our sample include such provisions. We further find that CEOs that receive a higher percentage of long term incentive pay as a fraction of their total pay, that work in industry sectors that are undergoing greater amounts of change, and that have lower long term profitability are statistically significantly more likely to have arbitration provisions in their employment contracts.

CEO, arbitration, employment contracts

Abstract:
In this paper, we examine whether labor groups should be allowed to use Rule 14a-8 as a mechanism for pursuing their interests as shareholders. We focus on the questions raised by corporate management about labor's potential conflicting roles as shareholders and workers. Using data from the 1994 proxy season, we conduct an empirical examination of the differences between shareholder resolutions proposed by labor groups and those sponsored by other investors. Our analysis focuses on shareholders' perceptions of these proposals and in particular the proposals' success in the ballot box. Our data set contains 192 shareholder proposals submitted by labor groups, public institutions, private institutions, and individuals. We include proposals covering internal and external corporate governance, compensation-related, and miscellaneous issues. We estimate regressions for the fraction of votes cast for a shareholder-sponsored corporate governance proposal including independent variables for sponsor, proposal type and ownership variables. We find that, controlling for the type of proposal and ownership structure: (1) labor-sponsored proposals receive a statistically significant higher percentage of favorable votes than do similar proposals sponsored by private institutions and individuals; and (2) labor-sponsored proposals obtain approximately the same percentage of votes as proposals sponsored by public institutions. To further explore these findings, we focus on a subsample of proposals identified by the ATA as specific instances where labor has used the proposal mechanism as part of a "corporate campaign." We find no significance difference between the average percentage votes cast for these allegedly "abusive" proposals and the average votes cast for all other corporate governance proposals. We do find that these proposals receive a slightly lower percentage of favorable votes than other labor proposals, but the difference is not statistically significant. We interpret these results to suggest that shareholders view labor proposals under Rule 14a-8 as favorably, or more favorably, than proposals made by other shareholders. Even in situations where labor is battling management over other issues, such as collective bargaining negotiations, shareholders continue to treat labor proposals as no different from those submitted by others. These results suggest that management's concerns with labor's use of the shareholder proposal mechanism are overstated and that regulatory reform is unnecessary.

Abstract:
We examine the relation between managers' financial interests and firm performance. Since the relation could go in either direction, we cast the analysis in a simultaneous-equations framework. For firms involved in acquisitions, we find that acquisition performance and Tobin's Q ratios affect the size of managers' stockholdings. We find no evidence, however, that larger managerial stockholdings lead to better performance. One possible reason is that managers with an equity stake in the firm may have the incentives but not the decision authority to affect performance. Alternatively, management is effectively disciplined by competition in product and labor markets. And finally, it may not be necessary for top executives to own stock to be residual claimants.

Abstract:
We propose that plaintiffs in securities fraud actions should use state inspection statutes to obtain discovery about potential securities fraud cases. First, we argue that the effect of the Private Securities Law Reform Act (PSLRA) has been to substantially increase the difficulty of uncovering securities fraud. We show that shareholders have an alternative method of investigating fraud using state inspection statutes. We then analyze cases filed under the Delaware inspection statute to examine the costs to plaintiffs of pursuing claims under this statute. We find that the statutory inspection process is a largely successful, expensive and time-consuming process. Nevertheless, potential plaintiffs could realize substantial benefits from utilizing inspection statutes in this manner.

Abstract:
This paper examines the motives underlying the payment method in corporate acquisitions. The findings support the notion that the higher the acquirer's growth opportunities, the more likely the acquirer is to use stock to finance an acquisition. Acquirer managerial ownership is not related to the probability of stock financing over small and large ranges of ownership, but is negatively related over a middle range. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns. It decreases with an acquirer's higher cash availability, higher institutional shareholdings and blockholdings, and in tender offers.

Abstract:
This paper provides evidence on the motives underlying the method of payment in corporate acquisitions. The findings support the notion that the higher a firm's growth opportunities, the more likely it is to use stock to finance an acquisition. In addition, the likelihood of stock financing increases with higher pre-acquisition market and acquiring firm stock returns and decreases with cash availability, institutional blockholdings, and in tender offers. Contrary to established theory, however, acquiring firms with higher growth opportunities experience announcement period abnormal stock returns that are significantly negative when stock financing is used regardless of management ownership stakes. Additionally, cash-financed acquisitions are met with significantly negative abnormal returns for acquiring firms with low ownership stakes regardless of the firm's growth opportunities.