Executive Compensation and the Corporate Spin-Off Decision
Ryerson University - Ted Rogers School of Management
Debarshi K. Nandy
Brandeis University - International Business School
Yisong S. Tian
York University - Schulich School of Business
July 5, 2011
This paper investigates the effect of CEO equity incentives on corporate spin-off decisions. We find that CEOs with stronger equity incentives are more likely to engage in corporate spin-offs and the announcements of such spin-offs are positively received by the market, as evidenced by both positive short-run (announcement effect) and long-run abnormal stock returns. Furthermore, the level of incentives matters for future stock performance subsequent to the spin-off. While spin-off announcements from low incentive firms have a stronger announcement effect, long run stock performance following spin-offs from high incentive firms are significantly better. A potential explanation for such differences is that low incentive firms also have more independent boards and thus the disciplining effect of a spin-off is stronger in such firms, especially in the short run. While a stronger board may be more influential at implementing key corporate decisions (such as spin-offs), better incentive alignment leads to superior long run stock performance. Our results therefore suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary to each other in the long run.
Number of Pages in PDF File: 48
Keywords: Spin-off, Executive compensation, Managerial equity incentives, Board Independence, Corporate restructuring, Long-term performance
JEL Classification: G34, M52working papers series
Date posted: July 7, 2011 ; Last revised: August 21, 2011
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