Are CEOs Incentivized to Split Their Stocks?

46 Pages Posted: 16 Mar 2010

See all articles by Erik Devos

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance

William B. Elliott

John Carroll University

Richard S. Warr

North Carolina State University

Date Written: March 15, 2010

Abstract

We provide evidence that the decision to split a firms’ stock is related to CEO compensation. Previous works document that, on average, stock splits lead to price increases and increased price volatility in the year following the split. We use the delta and vega of the CEO’s compensation package to measure CEO sensitivity to changes in the firm's stock price and changes in stock volatility, respectively. For a large sample of splits spanning 1992 to 2005, we find that higher delta and vega compensation is associated with a higher propensity to undertake a stock split. These findings are robust to other documented motivations for stocks splits, including the trading range, signaling, and tick size explanations. In addition, we find that vega is related to the magnitude of the stock split. Given that larger split factors are related to larger increases in volatility these findings confirm the importance of managerial incentives in determining stock split factors. Lastly, a large proportion of CEO option grants are made during the two days preceding and on the day of the stock split announcement. Overall, our findings suggest that managers can increase the risk profile (i.e. volatility) of the firm by cosmetically changing the firm (i.e. splitting the shares), and are induced to do so through the composition of their compensation packages.

Keywords: Stock Splits, Executive Compensation, Managerial Incentives

JEL Classification: G14, G32, J33

Suggested Citation

Devos, Erik and Elliott, William B. and Warr, Richard S., Are CEOs Incentivized to Split Their Stocks? (March 15, 2010). Available at SSRN: https://ssrn.com/abstract=1572263 or http://dx.doi.org/10.2139/ssrn.1572263

Erik Devos

University of Texas at El Paso - College of Business Administration - Department of Economics and Finance ( email )

500 W. University Ave.
El Paso, TX 79968
United States
915 747 7770 (Phone)

HOME PAGE: http://utminers/utep.edu/hdevos

William B. Elliott (Contact Author)

John Carroll University ( email )

University Heights, OH 44118
United States

Richard S. Warr

North Carolina State University ( email )

BOX 7229
Raleigh, NC 27695-7229
United States
919-513-4646 (Phone)
919-515-6943 (Fax)

HOME PAGE: http://www4.ncsu.edu/~rswarr/

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