Neslihan Ozkan

Executive incentives and payout policy: empirical evidence from Europe

We investigate how corporate payout policy is influenced by executive incentives, i.e. stock and option holdings, stock options delta, and stock-based pay-performance sensitivity for 1,650 publicly listed firms from the UK, Germany, France, Italy, the Netherlands, and Spain, over the period from 2002 to 2009. Our results show that executive stock option holdings and stock options delta are associated with lower dividend payments in our sample of European countries, where we do not observe any presence of dividend protection for executive stock options. We find that this relationship is mainly driven by exercisable stock options and by options that are in-the-money. Additionally, we observe that executive stock option holdings and stock options delta have a negative impact on total payout suggesting that executives do not substitute share repurchases for dividends. Furthermore, the fraction of share repurchases in total payout increases as executive stock option holdings and stock options delta increase. Finally, our results show that executive share ownership and stock-based pay-performance sensitivity may mitigate agency conflicts by significantly increasing the level of total payout.

R&D Investment and Revolving Credit

Using data for 939 publicly listed firms from 17 European countries over the period from 2004 to 2013, we investigate the effect of used credit lines on R&D investments, controlling for other determinants of R&D investments, i.e., cash flows, cash holdings, sales growth, equity financing, and Tobin’s Q. Our estimation results, based on the system-GMM method, show that used credit lines have a positive and significant impact on R&D investments. In addition, we find that this impact is more pronounced for small and young firms than for large and mature firms. These results show that firms use credit lines as part of their liquidity management tools for supporting their R&D investments. Finally, we provide evidence that European firms in bank-based countries increased their use of credit lines for financing their R&D investments during the financial crisis of 2007-2009, while the link between R&D investments and used credit lines became weaker during the European sovereign debt crisis of 2010-2013..Using data for 938 publicly listed firms from 17 European countries over the period 2004-2013, we investigate the effect of revolving credit on R&D investments. We find that revolving credit has a positive and significant impact on R&D investments, while term loans do not influence R&D investments. Further, we observe that small and young firms rely on revolving credit as a source of financing for their R&D investments while we do not observe any significant effect for mature and large firms. Our findings show that the significant and positive impact of revolving credit on R&D investment persists during the financial crisis of 2007-2009. Overall, our results are consistent with the view that firms rely on credit lines as part of their liquidity management tools.

Financial Distress Risk, Executive Compensation and the Executive Labour Market

This paper analyses the effect of financial distress risk on the initial compensation contracts of new executives in the UK, where credit markets are more concentrated than in the US. We find that financial distress risk has a negative and statistically significant impact on the level of cash-based compensation and total compensation of executives, who are newly hired from either outside or inside the firm. This negative impact is accentuated in firms with a high fraction of bank debt, suggesting that banks, as creditors, provide monitoring and influence initial executive compensation packages in firms with high financial distress risk. Additionally, we find that financial distress risk has a negative and significant impact on the fraction of equity-based compensation for both externally and internally appointed executives.

The Capital Investment Problem with Technological Change

The investment decision of a firm allowing for technological change is investigated. Based on the premise that technological change requires capital investment, a simple Q model of capital investment, which describes the investment behaviour of a perfectly competitive firm, is developed. The model is estimated using US manufacturing sector data over the period 1947-87 and the data provide support for the model. Copyright 2003 Blackwell Publishing Ltd and The Victoria University of Manchester.