Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data

Review of Financial Studies, Forthcoming

59 Pages Posted: 9 Apr 2013 Last revised: 2 Mar 2017

See all articles by Stuart Gillan

Stuart Gillan

University of Georgia - Department of Finance

Jay C. Hartzell

University of Texas at Austin - Department of Finance

Andrew Koch

University of Pittsburgh - Finance Group

Laura T. Starks

University of Texas at Austin - Department of Finance

Date Written: November 1, 2016

Abstract

We document that backfilling in the ExecuComp database introduces a data-conditioning bias that can affect inferences and make replication of previous work difficult. Although backfilling can be advantageous due to greater data coverage, if not addressed the over-sampling of firms with strong managerial incentives and higher subsequent returns leads to a significant upward bias in abnormal compensation, pay-for-performance sensitivity, and the magnitudes of several previously established relations. The bias can also lead to misinterpretations of the appropriate functional form of a relation and whether the data supports one compensation theory over another. We offer methods to address this issue.

Keywords: executive compensation

JEL Classification: J33, J44, G30

Suggested Citation

Gillan, Stuart L. and Hartzell, Jay C. and Koch, Andrew and Starks, Laura T., Getting the Incentives Right: Backfilling and Biases in Executive Compensation Data (November 1, 2016). Review of Financial Studies, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2247055 or http://dx.doi.org/10.2139/ssrn.2247055

Stuart L. Gillan

University of Georgia - Department of Finance ( email )

Terry College of Business
Athens, GA 30602-6253
United States

Jay C. Hartzell

University of Texas at Austin - Department of Finance ( email )

1 University Station B6600
Austin, TX 78712
United States
512-471-6779 (Phone)
512-471-5073 (Fax)

HOME PAGE: http://www.mccombs.utexas.edu/faculty/jay.hartzell/

Andrew Koch (Contact Author)

University of Pittsburgh - Finance Group ( email )

372 Mervis Hall
Pittsburgh, PA 15260
United States

Laura T. Starks

University of Texas at Austin - Department of Finance ( email )

Red McCombs School of Business
Austin, TX 78712
United States
512-471-5899 (Phone)
512-471-5073 (Fax)

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