Managerial Incentives and IPO Failure Risk
92 Pages Posted: 11 Feb 2019 Last revised: 29 Aug 2019
Date Written: April 9, 2019
IPO firms with high-powered CEO incentive contracts have lower failure rates in the aftermarket. Economically, an interquartile change in the distribution of CEO pay translates in a reduction of the failure risk probability by approximately 21%. The Pay Gap between the CEO and its subordinate executives (tournament incentives) also plays a major role in lowering IPO failure risk. The effectiveness of CEO pay is strengthened among well-governed firms, whereas tournament incentives are essential when there is high CEO succession risk. Both measures of executive pay are associated with better financial reporting quality, higher investment efficiency, and superior operating performance.
Keywords: Executive Compensation, Pay Gap, IPO Survival, Initial Public Offerings
JEL Classification: G24, G30, G31, G32, J31, J33, L25
Suggested Citation: Suggested Citation