Chandra Subramaniam

Executive Compensation: Excessive or Equitable?

The eighties and nineties have seen much debate about CEO compensation. Critics of CEO compensation support their contention of excessive and inequitable CEO pay based on a number of factors and premises. This paper examines the validity of these arguments. We show why many of these arguments fail to persuade, in part, because they attempt to determine propriety of CEO pay without having a definitive standard for comparison. Arguments based on comparisons between CEO pay and the pay of other individuals or jobs or between CEO pay and firm performance are shown to be an insufficient mechanism to determine the appropriateness of CEO compensation.

Free Cash Flow, Golden Parachutes, and the Discipline of Takeover Activity

We conjecture that golden parachutes are initiated when the agency cost of free cash flow is most severe. We examine the relation between golden parachutes and investment levels in firms that have been successfully acquired. Our results support these three conclusions. First, target firms overinvest prior to an acquisition when golden parachutes are present. Second, the acquirers of targets with golden parachutes reduce investment subsequent to the takeover. Third, the reversal in capital investment by the combined firm is correlated with the magnitude of the targets pre-acquisition overinvestment. The latter findings indicate the takeover acts as a disciplining mechanism with the acquirer reversing the target overinvestment subsequent to the acquisition Copyright Blackwell Publishers Ltd 2000.

Do XBRL Reports Have Incremental Information Content? – An Empirical Analysis

This study investigates whether XBRL filings of 10Ks and 10Qs possess incremental information content beyond current EDGAR filings in HTML format. The sample comprises of 342 voluntary XBRL filings from the period of 2005 to June 30, 2008. We document a significant market reaction on the day when XBRL reports are filed. The market response is stronger for larger firms, more recent filings and more timely filings. Furthermore, it is more pronounced in instances where multiple reports are filed. Using the R2 in a regression of fiscal quarter abnormal returns on XBRL filing abnormal returns, we find that approximately 1.2% to 8.0% out of total information content in earnings disclosures is associated with these XBRL filings.

Mandated Recognition of Employee Stock Option Expense – The Case of Canada

On December 18, 2003 the Accounting Standards Board of Canada announced that all firms registered in Canada would be required to expense stock options‐based compensation effective January 1, 2004. While a few firms had voluntarily opted to expense stock options prior to this date, the vast majority of firms had not. This study investigates the market reaction to this announcement by listed firms in the Toronto Stock Exchange that continued to disclose option expense rather than report it in the financial statement. We find no average market reaction by our sample firms affected by this mandate around the announcement date, but a significantly negative market reaction during the 5‐day window around the issuance date of the exposure draft. However, in cross‐sectional tests around the mandated expense announcement date, we find a significant negative relationship between the cumulative abnormal returns and the Black–Scholes value (and number) of options outstanding and of options granted the previous year. These results suggest that the magnitude of the market reaction to the mandated expense announcement is related to the firms usage of options. Our results provide further evidence that stock prices may not fully impound information disclosed in footnotes.

The Market Valuation of Earnings and Real Growth

ince John Burr Williams [1938] wrote “let us define the investment value of a stock as the present worth of all the dividends to be paid upon it,” investment analysts have searched for new models to estimate values for common stocks. This list of models is long, and while each has its own special twist or turn, for the most part they all base value in one way or another on the present value of expected future earnings, dividends, or cash flows. Back in 1961, Miller and Modigliani demonstrated theoretically that all models, regardless of whether they discount expected earnings, dividends, cash flows, or investment opportunities, are essentially equivalent. In practice, however, a security analyst may have reasons for preferring one model over another. The dividend-based models have theoretical appeal and are a primary valuation tool for analysts. Although a number of studies have shown the usefulness of dwidend discount models, their major drawback is that they require an estimate of future dividends (see Sorensen and Wilhamson [1985] and Rozeff [1990]). While estimating future dividends by projecting past growth rates is feasible for stocks with a hstory of stable dividends and growth, estimation becomes increasingly difficult for companies with varying growth rates or irregular dividend payouts. In such cases, earnings-based valuation approaches may be more useful. Some analysts even feel that earnings growth is more important than dividend growth (Raghavan [1993]). In this article, we derive an earnings-based valuation model, develop a method for estimating the growth rate in the model, and apply the model to current earnings on the Standard & Poor’s 500 index to estimate its value. We show that the real growth rate of an index representing the entire stock market (such as the S&P 500) is closely related to real economic growth. Finally, we demonstrate that the earnings valuation model compares favorably to the dividend discount model in its ability to value the S&P 500. Because the model should not be limited to valuing a market index such as the S&P 500, analysts should also be able to use the model with earnings of an individual firm to estimate the value of the firm’s stock.

Option repricing and executive retention – revisited

Purpose - This paper aims to directly test the assertion by proponents of executive stock option repricing that repricing leads to increased management retention. Previous studies find either no effect or decreased retention following stock price repricing. This paper uses a more precise research design to re-examine the relationship between stock option retention and management retention. Design/methodology/approach - The authors use an empirical methodology and construct a sample of 158 firms and 201 repricing events, and a control sample of 201 non-repricing firms. They then examine executive turnover in the four years following the stock option repricing event. Findings - It was found that, consistent with agency theory, stock option repricing actually results in greater executive retention. Specifically, CEO retention is significantly greater for repricing firms relative to non-repricing firms for up to three years following the repricing date, and non-CEO executive retention is significantly greater for two years. Research limitations/implications - Firms continue to restructure management through stock option repricing. However, recent option repricing has been undertaken during a period when the economy is in decline, making it is difficult to disentangle effects of option repricing on management retention. Hence, this paper uses repricing data from an earlier period, from 1992-1997, when the economy was good. Originality/value - Many firms argue that when stock options are out-of-the-money and managerial talent is in demand, repricing executive stock options is necessary to retain managers. Previous studies find contradictory or no support for this view. Using a much more precise methodology, this paper shows that firms do retain managers when they reprice their options compared to when they do not.

Looking back at SFAS no. 90: how it affected nuclear electric utilities

Abstract In 1986, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 90 : Regulated Enterprises—Accounting for Abandonments and Disallowances of Plant Costs (hereafter SFAS No. 90). SFAS No. 90 required many public utilities, particularly those with nuclear generating plants recently completed or still under construction, to record substantial write-offs. Prior to the enactment of this standard by the Financial Accounting Standards Board, public utilities were predicting financial and economic disaster for the industry. In this paper we examine the monetary and economic effects of SFAS No. 90 and find that, although the financial effects certainly can be documented, the dire economic effects predicted by the utility industry did not appear to transpire. In addition, it is difficult to trace the effects that did parallel the development and passage of the standard directly to the standard itself.