Shahbaz A Sheikh

Termination Risk and Managerial Risk Taking

We study the empirical evidence on the relationship between the conditional probability of being fired in the event of poor performance (termination risk) and managerial risk-taking. Previous research has focused on compensation risk only and shown that it has a negative effect on risk-taking. We find that termination risk reduces managerial risk taking similarly. Firms that are more likely to fire their managers for poor performance have significantly lower volatility of stock returns. Further, the positive effect of the convexity of the managers compensation contract on risk taking is also lower at firms where termination risk is high. A 10% increase in the conditional termination propensity results in 5%-22% reduction in stock return volatility for the median firm in our sample.

Do CEO compensation incentives affect firm innovation

Purpose - The purpose of this paper is to examine if the structure and design of CEO compensation has any effect on firm innovation. It further investigates the effectiveness of each component of portfolio of compensation incentives in encouraging innovation. Design/methodology/approach - This study uses systems of simultaneous equations to model the interdependence between compensation incentives and measures of firm innovation. Findings - Results indicate that the pay-performance sensitivity of the CEO portfolio of compensation incentives is positively related to investment in R&D expenditures, number of patents and citations. Options in general are more effective than stocks. However, within the options portfolio, recently awarded and unvested options are more effective than previously awarded and vested options. Restricted stock is more effective than unrestricted stock. Research limitations/implications - Measuring innovation output is difficult as innovation could take different forms, including business model innovation, which does not appear in the patent data. Practical implications - Stock options encourage investment in value-increasing innovations and should remain a significant part of managerial compensation. If the firm awards stock, it should only award restricted stock. Originality/value - This study uses comprehensive measures of compensation incentives and firm innovation. It views incentives as a portfolio of stock and options and uses incentives in their entirety. It examines the effectiveness of each component of the portfolio in encouraging innovation. It measures innovation as investment into the innovation process (R&D expenditures) and the resulting success of that investment (patents and citations).

Corporate governance mechanisms and performance related CEO turnover

This study investigates the impact of corporate governance mechanisms on performance related turnover. Our results indicate that smaller boards and institutional block holders are positively related to the likelihood of performance related turnover. CEOs that also hold the position of the chairman of the board or belong to a founding family face lower likelihood of turnover. CEO stock ownership is negatively related to turnover and CEOs who own 3 percent or more of their company stock face a significantly lower likelihood of performance related turnover. Moreover, protection from external control market has no effect either on the likelihood of turnover.

Peer group benchmarking in CEO compensation and firm innovation: evidence from patents and citations

This study provides empirical evidence on the relation between peer group benchmarking in CEO compensation and firm innovation measured by number of patents and citations. Results show that peer group benchmarking and firm innovation are positively related. However, this positive relation holds only for CEOs who receive higher than median peer group compensation. For CEOs who receive lower than median peer group compensation, benchmarking seems to have no statistically significant effect on firm innovation. The study also finds that CEO compensation benchmarked against median peer group compensation is positively related to one-year and five-year stock return volatility. Overall, results suggest that benchmarking in CEO compensation is an efficient response to competitive pressures in CEO talent market and is not driven by an intentional effort by the powerful CEOs to extract rents from their firms.