Executive Compensation Structure and the Motivations for Seasoned Equity Offerings

45 Pages Posted: 9 Jan 2014 Last revised: 5 Feb 2014

Eric R. Brisker

The University of Akron

Don M. Autore

Florida State University - College of Business

Gonul Colak

Hanken School of Economics

David R. Peterson

Florida State University - Department of Finance

Date Written: January 15, 2014

Abstract

We hypothesize that managers who receive high equity-based compensation have greater incentive to avoid ownership dilution by timing their seasoned equity offers to periods when investors temporarily overvalue their stock. We provide empirical support for this hypothesis using a measure of equity-based compensation that reflects the sensitivity of the top five executives’ wealth (based on ownership of stock, options, and restricted shares) to a 1% change in stock price. We find that firms associated with high equity-based compensation for top executives experience abnormally low stock returns and relatively unfavorable changes in operating performance in the three-year period following the issue. Overall, the findings support the premise that managers whose wealth is most sensitive to stock price changes are more likely to act in the interest of current shareholders by issuing equity when they believe their stock is overvalued.

Keywords: Seasoned equity offerings; Executive compensation; Equity-based compensation

JEL Classification: G32, G34

Suggested Citation

Brisker, Eric R. and Autore, Don M. and Colak, Gonul and Peterson, David R., Executive Compensation Structure and the Motivations for Seasoned Equity Offerings (January 15, 2014). Journal of Banking and Finance 40, 330-345. . Available at SSRN: https://ssrn.com/abstract=2375845

Eric R. Brisker (Contact Author)

The University of Akron ( email )

Akron, OH 44325-4803
United States

Don M. Autore

Florida State University - College of Business ( email )

821 ACADEMIC WAY, Room 314 RBA
P.O. Box 3061110
Tallahassee, FL 32306-1110
United States
850-644-7857 (Phone)

Gonul Colak

Hanken School of Economics ( email )

P.O. Box 479
FI-00101 Helsinki, 00101
Finland

David R. Peterson

Florida State University - Department of Finance ( email )

Tallahassee, FL 32306-1042
United States
850-644-8200 (Phone)
850-644-4225 (Fax)

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