Executive Compensation Structure and the Motivations for Seasoned Equity Offerings
45 Pages Posted: 9 Jan 2014 Last revised: 5 Feb 2014
Date Written: January 15, 2014
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: Suggested Citation