Thomas O. Meyer

Executive Incentive Compensation Schemes and their Impact on Corporate Performance: Evidence from New Zealand Since Legal Disclosure Requirements Became Effective

For many years, executive compensation has been regarded as an internal mechanism to alleviate the agency problems between executives and shareholders. Using a sample of 73 New Zealand listed companies (1994-1998), this paper examines the current state of executive compensation in New Zealand and the relationship between executive incentive compensation and firm performance. The empirical results concerning the relationship between executive compensation and corporate performance indicate that company size and business risk are important factors affecting executive compensation level. The results also show that neither compensation level nor the adoption of an incentive compensation scheme (ICS) are significantly related to corporate performance. However, the relationship between Tobins q and executive share ownership is found to be strong and statistically significant, while the relationship is found to be insignificant when ROE and ROA are used as a proxy for corporate performance. These negative results suggest that the design of the executive compensation contract has not yet contributed to the reduction of agency costs for companies in New Zealand.

The informational content of credit rating announcements for share prices in a small market

The informational value of credit ratings is a subject of continuing debate. This research examines whether reaction to small market credit rating announcements is different from large markets, due to limited information, liquidity premia, and analyst neglect factors. Unlike U.S. and Australian studies that find a significant reaction to only bad news, a significant positive reaction to both positive placements and upgrades is found in the New Zealand market. Further, significant market reaction largely accrues to firms not cross-listed in U.S. markets. This evidence suggests credit rating agencies act as substitute information providers for firms followed by relatively few analysts.

Creditworthiness or Management Signal? An Empirical Investigation of Loan Commitments Obtained by Non-Taxable Firms

Market reaction to the announcement of obtaining loan commitments (LCs) is examined for a unique sample of tax-exempt real estate investment trusts (REITs). Debt-interest tax incentives may be ruled out on a theoretical basis and empirically due to a significant positive market reaction. Thus, evidence is developed to differentiate between two signaling-effect explanations. The analysis supports the hypothesis that management procures LCs to undertake new real estate investments. This action is interpreted by the market as a signal of managements superior information regarding the REITs true equity value.

The valuation effects of bank loan ratings in the presence of multiple monitors

Studies have shown that when two information providers or outside auditors exist, the value provided by the second one will be decreased by the actions of the first. Credit rating agencies have been rating bank loans since 1996. Capitalizing on the highly similar functions performed by banks and these agencies, the informational value of bank loan ratings is examined. Further, evidence is provided on whether rating agencies duplicate the certifying and monitoring roles played by banks. The significant market reaction to negative bank loan rating announcements suggests these rating actions convey information beyond that provided via bank loan approvals and renewals.

Ethical Performance, Financial Performance and the Quality of Financial Reporting

This research examines the economic impact of firms acting ethically on financial reporting performance and quality. We assess the impact of quarterly changes in the Covalance Ethics Index (CEI) rankings compared to firm financial performance (FP) and financial reporting quality (FRQ). A significant positive (negative) stock market reaction to CEI upgrades (downgrades) is observed. Further, the results of correlation and logistic regression analysis suggest that a positive association between increased firm ethical behaviour and performance exists. Finally, multivariate analysis consistently shows that CEI ranking downgrades reflect both lower FP and FRQ rankings. Collectively, these results suggest that corporate measures taken to increase ethical performance are associated with positive benefits to shareholders.

Option Backdating: Market Overreaction and Management Motives

Prior studies on option backdating have focused exclusively on the initial backdating investigation announcements. We extend the analyses to consider the outcomes of the investigation as well. By examining the market responses both to the initial investigation announcement and to the investigation outcome, we provide an evidence that the market may have overreacted to the initial investigation announcement. Our results also show that the media bias in covering more bad than good news may have contributed to the overreaction. Finally, we re-examine the issue of management motives, focusing on firms which were found to be guilty of intentional backdating. No prior study has addressed the motive issues with the sample of “true” backdators before.

Guilty Until Proven Innocent: The Economic Consequences of the Initiation and the Outcome of Internal Investigations of Option Backdating

Backdating occurs when a company retroactively changes option grant dates to dates when its stock was trading at a relatively low price. Firm announcements of backdating generated adverse media publicity and negative pronouncements from academics regarding the economic effects and motivation of those involved. We find evidence that management engages in backdating to generate motivational benefits for employees rather than enriching themselves. By not accounting for the outcomes of the investigations the economic impact of these events is overstated and unfairly portrays nearly half of the firms as guilty when they have not engaged in intentional backdating.