Kristina Minnick

Pay for Performance? CEO Compensation and Acquirer Returns in BHCs

We examine how managerial incentives affect acquisition decisions in the banking industry. We find that higher pay-for-performance sensitivity (PPS) leads to value-enhancing acquisitions. Banks whose CEOs have higher PPS have significantly better abnormal stock returns around the time of the acquisition announcements. On average, acquirers in the high-PPS group outperform their counterparts in the low-PPS group by 1.4% in a three-day window around the announcement. Higher PPS helps reduce the incentives for making value-destroying acquisitions, while at the same time promotes value-enhancing acquisitions. The positive market reaction can be rationalized by post-merger performance. Following acquisitions, banks with higher PPS experience greater improvements in their operating performance. We show that the effect of PPS is mainly evident in small and medium-sized banks, but is not present in large banks. The Author 2011. Published by Oxford University Press on behalf of The Society for Financial Studies. All rights reserved. For Permissions, please e-mail: journals.permissions@oxfordjournals.org., Oxford University Press.

Does Say on Pay Matter? Evidence from Say-on-Pay Proposals in the United States

We investigate the effect of say-on-pay (SOP) proposals on changes in executive and director compensation. Relative to non-SOP firms, SOP firms’ total compensation to CEOs does not significantly change after the proposal. Although the total compensation does not change, the mix of compensation does change – companies move away from using cash compensation toward more incentive compensation, offsetting the reduction in bonus. Further, the mix of compensation of non-CEO executives changes similarly to that of CEOs. Compensation to directors of SOP firms increases significantly less than non-SOP firms’. Firms whose CEOs are well compensated, especially with cash-based compensation, are most likely to receive a proposal.

CEO Tournaments: A Cross-Country Analysis of Causes, Cultural Influences and Consequences

Using a cross-country sample, we examine the chief executive officer (CEO) tournament structure (measured alternatively as the ratio and the difference of pay between the CEO and other top executives within a firm). We find the tournament structure to vary systematically with firm and country cultural characteristics. In particular, firm size and the cultural values of power distance, fair income differences, and competition are significantly associated with variations in tournament structures. We also establish support for the primary implication of tournament theory in that tournament structure tends to be positively related to firm value, even after controlling for endogeneity.

Why are Stock Splits Declining

The proportion of U.S. companies undertaking stock splits drops from 23% in 1982 to less than 1% in 2009. This trend is partly attributable to changes in firm and market characteristics, including improvements in stock liquidity, and, declines in profitability, dividend-paying propensity, and investor demand for low priced stocks. However, regardless of characteristics, firms exhibit a lower propensity to split. We similarly find a time-series decline in the size of split factors. Overall, given the costs associated with splits, the decline in stock split activity appears to be a rational response by firms to changes in market dynamics.

Horse Race or Heir Apparent: The Role of Internal Competition on New CEOs’ Compensation

We examine the dynamics of firms’ internal succession methods and find that horse race successions are common among the largest U.S. firms. Although heir and horse race CEO candidates are of similar quality, the consequences of these two succession methods differ significantly. We show that horse race successions induce conflict and are detrimental to the firm but not to the newly appointed CEOs. Our findings suggest firm’s succession methods influence the CEO labor market, CEO compensation, and firm performance. These findings highlight the importance of CEO succession planning in the form of grooming an heir.We examine the dynamics of firms’ internal succession methods and find that horse race successions are common among the largest U.S. firms. Although heir and horse race CEO candidates are of similar quality, the consequences of these two succession methods differ significantly. We show that horse race successions induce conflict and are detrimental to the firm but not to the newly appointed CEOs. Our findings suggest firm’s succession methods influence the CEO labor market, CEO compensation, and firm performance. These findings highlight the importance of CEO succession planning in the form of grooming an heir.

Supply Chain Characteristics and Bank Lending Decisions

This paper investigates whether borrowers’ supply chain relationships affect banks’ lending decisions. These relationships benefit firms by reducing the information gap with banks, which increases the access to capital, while reducing the cost of the loan. However, banks demand increased intensity of covenants and greater use of collateral when the correlation of cash flows among firms in the supply chain is high. Longer relationships between the borrower and its supply chain partner, and between the bank and the borrower’s supply chain partner, mitigate lending constraints. The evidence suggests supply chains serve as an informational bridge between lenders and borrowers.

CEO Compensation and the Sale of Private Firms

We analyze the relation of private firms’ CEO compensation with the probability of sale of a firm and its valuation at the time of the sale. Specifically, we study whether equity-based remuneration is consistent with compensating the CEO for effort related to selling the private firm, or with compensating for the illiquidity of the equity-based compensation for private firms. Using a sample of large private firms with public filings, we find that CEOs of IPO and acquired private firms have higher total and equity-based compensation than CEOs of firms that remain private. We also show that CEO compensation is positively related to the valuation premium of IPOs versus acquired firms.