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Executive pay and shareholder litigation

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  • Lin Peng
  • Ailsa Röell
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    Abstract

    The paper examines the impact of executive compensation on private securities litigation. We find that incentive pay in the form of options increases the probability of securities class action litigation, holding constant a wide range of firm characteristics. We further document that there is abnormal upward earnings manipulation during litigation class periods and that insiders exercise more options and sell more shares during class periods, but that this activity is largely driven by pre-existing option holdings of the managers. Our results suggest that option-based compensation may have the unintended side effect of giving executives an incentive to focus excessively on the short term share price. Copyright 2008, Oxford University Press.

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    File URL: http://hdl.handle.net/10.1093/rof/rfl003
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    Bibliographic Info

    Article provided by European Finance Association in its journal Review of Finance.

    Volume (Year): 12 (2008)
    Issue (Month): 1 ()
    Pages: 141-184

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    Handle: RePEc:oup:revfin:v:12:y:2008:i:1:p:141-184

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    Cited by:
    1. Baglioni, Angelo & Colombo, Luca, 2011. "The effects of imperfect auditing on managerial compensation," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 542-548, October.
    2. Daines, Robert M. & Gow, Ian D. & Larcker, David F., 2010. "Rating the ratings: How good are commercial governance ratings?," Journal of Financial Economics, Elsevier, vol. 98(3), pages 439-461, December.
    3. Nogata, Daisuke & Uchida, Konari & Goto, Naohisa, 2011. "Is corporate governance important for regulated firms' shareholders?: Evidence from Japanese mergers and acquisitions," Journal of Economics and Business, Elsevier, vol. 63(1), pages 46-68, January.
    4. Carola Frydman & Dirk Jenter, 2010. "CEO Compensation," CESifo Working Paper Series 3277, CESifo Group Munich.
    5. Nana Y. Amoah, 2012. "Option grants and investor reaction to restatement-induced litigation Purpose – The purpose of this paper is to examine the relation between CEO option grants at the beginning of the class period (B," Review of Accounting and Finance, Emerald Group Publishing, vol. 1(1), pages 40-52, February.
    6. Humphery-Jenner, Mark L., 2012. "Internal and external discipline following securities class actions," Journal of Financial Intermediation, Elsevier, vol. 21(1), pages 151-179.
    7. Immordino, Giovanni & Pagano, Marco, 2008. "Corporate Fraud, Governance and Auditing," CEPR Discussion Papers 7104, C.E.P.R. Discussion Papers.
    8. Peng, Lin & Röell, Ailsa A, 2009. "Managerial Incentives and Stock Price Manipulation," CEPR Discussion Papers 7442, C.E.P.R. Discussion Papers.
    9. McTier, Brian C. & Wald, John K., 2011. "The causes and consequences of securities class action litigation," Journal of Corporate Finance, Elsevier, vol. 17(3), pages 649-665, June.
    10. Crutchley, Claire E. & Minnick, Kristina, 2012. "Cash versus incentive compensation: Lawsuits and director pay," Journal of Business Research, Elsevier, vol. 65(7), pages 907-913.
    11. Wu, Yan Wendy, 2011. "Optimal executive compensation: Stock options or restricted stocks," International Review of Economics & Finance, Elsevier, vol. 20(4), pages 633-644, October.
    12. Siegert, Caspar, 2014. "Bonuses and managerial misbehaviour," European Economic Review, Elsevier, vol. 68(C), pages 93-105.
    13. Pierre Chaigneau, 2010. "The Optimal Timing of Executive Compensation," FMG Discussion Papers dp660, Financial Markets Group.
    14. Robert Jones & Yan Wu, 2010. "Executive compensation, earnings management and shareholder litigation," Review of Quantitative Finance and Accounting, Springer, vol. 35(1), pages 1-20, July.

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