Executive Compensation and the Corporate Spin-Off Decision

48 Pages Posted: 7 Jul 2011 Last revised: 21 Aug 2011

See all articles by Yi Feng

Yi Feng

Ryerson University - Ted Rogers School of Management

Debarshi K. Nandy

Brandeis University - International Business School

Yisong S. Tian

York University - Schulich School of Business

Date Written: July 5, 2011

Abstract

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.

Keywords: Spin-off, Executive compensation, Managerial equity incentives, Board Independence, Corporate restructuring, Long-term performance

JEL Classification: G34, M52

Suggested Citation

Feng, Yi and Nandy, Debarshi K. and Tian, Yisong Sam, Executive Compensation and the Corporate Spin-Off Decision (July 5, 2011). Available at SSRN: https://ssrn.com/abstract=1879667 or http://dx.doi.org/10.2139/ssrn.1879667

Yi Feng

Ryerson University - Ted Rogers School of Management ( email )

350 Victoria Street
Toronto, Ontario M5B 2K3
Canada
416-979-5000 ext. 6755 (Phone)

Debarshi K. Nandy (Contact Author)

Brandeis University - International Business School ( email )

Mailstop 32
Waltham, MA 02454-9110
United States

Yisong Sam Tian

York University - Schulich School of Business ( email )

4700 Keele Street
Toronto, Ontario M3J 1P3
Canada
416-736-2100, ext 77943 (Phone)
416-736-5687 (Fax)

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