Executive Bonus Contract Characteristics and Share Repurchases

Posted: 3 Apr 2017

See all articles by Sunyoung Kim

Sunyoung Kim

Monash University

Jeff Ng

Chinese University of Hong Kong (CUHK) - School of Accountancy

Date Written: March 27, 2017

Abstract

We examine the importance of bonus contract characteristics, specifically with respect to the relation between EPS-based bonuses and share repurchases. We find that managers are more (less) likely to repurchase shares and spend more (less) on repurchases when as-if EPS just misses (exceeds) the bonus threshold (maximum) EPS level. We find no such relation when as-if EPS is further below the threshold. We find weak evidence that managers of firms with as-if EPS just below the EPS target are more likely to repurchase shares and spend more on repurchases relative to firms with as-if EPS just above the EPS target. We further find that the incentive-zone slopes specified in the bonus contracts are positively associated with share repurchases. Managers making bonus-motivated repurchases do so at a higher cost. Together, our results highlight the importance of compensation design in motivating managers’ behavior and aligning managers’ incentives with shareholders.

Suggested Citation

Kim, Sunyoung and Ng, Jeff, Executive Bonus Contract Characteristics and Share Repurchases (March 27, 2017). The Accounting Review, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2941290

Sunyoung Kim

Monash University ( email )

H3.43, Building H, Level 3
Monash University Caulfiled
Melbourne, VIC 3145
Australia
613 99032183 (Phone)

Jeff Ng (Contact Author)

Chinese University of Hong Kong (CUHK) - School of Accountancy ( email )

Shatin, N.T.
Hong Kong
+852 39437742 (Phone)

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