Stephen A. Hillegeist

Financial Distress Risk and New CEO Compensation

We examine how ex ante financial distress risk affects CEO compensation. To disentangle the joint effects of performance on compensation and distress risk, we focus our analyses on new CEOs. Our results indicate that financial distress risk affects compensation through two channels. First, new CEOs receive significantly more compensation when financial distress risk is higher. This finding is consistent with CEOs receiving a compensation premium for bearing this risk since CEOs experience large personal costs if their firms later become financially distressed. Second, financial distress risk is associated with the incentives provided to new CEOs; distress risk is positively associated with pay-performance sensitivity and equity-based compensation and is negatively associated with cash bonuses. Further, financial distress risk is positively associated with pay-risk sensitivity for new CEOs. These findings suggest that financial distress risk alters the nature of the agency relationship in ways that lead fi...

Insider Trading and Post-Earnings Announcement Drift

This paper examines the association between insider trading during the pre-earnings announcement period and the magnitude of the post-earnings announcement drift (PEAD). Consistent with insiders’ private information being incorporated into prices through their trading, we find PEAD is significantly lower when earnings announcements are preceded by insider trading. This negative association between insider trading and PEAD is stronger when information asymmetry between insiders and outsiders is higher, and when internal and external monitoring of insider trades is weaker. However, in contrast to our primary results, we find that in cases of confirming insider trading (i.e., high levels of insider buying (selling) preceding large positive (negative) earnings surprises), PEAD is significantly larger. Our evidence suggests such trades are based on insiders’ private information about earnings surprises in subsequent quarters and the market fails to fully account for the information contained in these trades. Overall, our findings indicate insider trading contributes to stock pricing efficiency by conveying insiders’ private information to the market.

Capitalization of In-Process Research and Development Under SFAS 141R and Information Asymmetry

This study examines the effect of capitalizing acquired in-process research and development (IPR&D) on information asymmetry under the Statement of Financial Accounting Standard No. 141 (R). SFAS 141R requires acquirers to fully recognize IPR&D at fair value as an indefinite-lived intangible asset until completion or discontinuation of the project. Using a difference-in-difference research design, we find bid-ask spreads of IPR&D acquirers are higher in the post-SFAS 141R period, relative to non-IPR&D acquirers, suggesting increased information asymmetry of IPR&D acquirers under the new capitalization requirement. Alternative measures of information asymmetry provide consistent inferences. Additional analyses indicate earnings management through asset-classification shifting between IPR&D and goodwill is an explanation for the increase in information asymmetry. Overall, our evidence is consistent with IPR&D acquirers strategically using the additional reporting discretion afforded them under SFAS 141R in ways that degraded the information environment. As such, our evidence is relevant to the deliberations regarding whether capitalizing or expensing is the most appropriate method to account for R&D expenditures.