Executive Compensation Structure and Corporate Equity Financing Decisions

Posted: 1 Dec 2003

See all articles by Sudip Datta

Sudip Datta

Wayne State University - Finance Department

Kartik Raman

Bentley University

Mai Iskandar-Datta

Wayne State University - Finance Department

Multiple version iconThere are 2 versions of this paper

Date Written: June 23, 2003

Abstract

Building on Myers and Majluf's (1984) model, we propose that the magnitude of the market response to seasoned equity offering (SEO) announcements depends on the degree of alignment between the goals of managers and existing shareholders. We document a negative relation between the stock market response to SEO announcements and equity-based compensation (EC) awarded to issuing firm managers. The evidence suggests that the market perceives high EC managers as issuing more-overvalued equity (relative to low EC managers), which benefits existing shareholders and exacerbates the adverse selection problem for potential new shareholders. The relation between EC and the market reaction to SEOs varies cross-sectionally with (a) information asymmetry, (b) investment opportunities, (c) pre-issue stock price run-up, and (d) managerial ownership. Our study highlights the importance of a cohesive executive compensation policy and corporate financing policy.

Keywords: Executive compensation, Financing, Equity offering, SEOs

JEL Classification: G30, G32

Suggested Citation

Datta, Sudip and Raman, Kartik and Iskandar-Datta, Mai E., Executive Compensation Structure and Corporate Equity Financing Decisions (June 23, 2003). Available at SSRN: https://ssrn.com/abstract=465160

Sudip Datta (Contact Author)

Wayne State University - Finance Department ( email )

328 Prentis Bldg.
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Detroit, MI 48202
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(313) 577- 0408 (Phone)
(313) 577-0058 (Fax)

Kartik Raman

Bentley University ( email )

175 Forest Street
Waltham, MA 02154
United States

Mai E. Iskandar-Datta

Wayne State University - Finance Department ( email )

328 Prentis Bldg.
5201 Cass Avenue
Detroit, MI 48202
United States
(313) 577-9509 (Phone)

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