Anticipated Incentives in CEO Compensation Contracts: Estimation and Application
Open Access
Author:
Tarrant, Ian Michael
Graduate Program:
Business Administration
Degree:
Doctor of Philosophy
Document Type:
Dissertation
Date of Defense:
December 13, 2018
Committee Members:
Guojin Gong, Dissertation Advisor/Co-Advisor Guojin Gong, Committee Chair/Co-Chair Karl A Muller III, Committee Member John Edward Ketz, Committee Member Fenghua Song, Outside Member
Keywords:
CEO Compensation Earnings Management Simulation Equity Incentives
Abstract:
Extant empirical research has largely overlooked the incentives that arise when CEOs can reasonably anticipate future awards and liquidations of equity-based compensation. In this study, I use past patterns of stock and option awards, exercises, and sales to estimate future awards, exercises, and sales, which I argue are anticipated by the CEO and act as an important incentive. The anticipated incentives I estimate are large in magnitude and provide information that is incremental to the CEO’s existing portfolio of equity incentives disclosed in the annual proxy statement. In empirical analyses, I find that anticipated incentives are negatively (positively) associated with proxies for real (accruals-based) earnings management even in the presence of existing measures of CEO incentives. My findings suggest that the ex ante measure of anticipated incentives introduced in this study captures a new source of information that is decision-relevant for CEOs but currently omitted from existing empirical proxies.
