Not So Lucky Any More: CEO Compensation in Financially Distressed Firms
AbstractThere is a debate on whether executive pay reflects rent extraction due to "managerial power" or is the result of arms-length bargaining in a principal-agent framework. In this paper we offer a test of the managerial power hypothesis by empirically examining the CEO compensation of U.S. public companies that were ever in financial distress between 1992 and 2005. Using a bias-corrected matching estimator that estimates the causal effects of financial distress, we find that, for the distressed firms, CEO turnover rates increase markedly and their CEOs, both incumbents and successors, experience significant reductions in total compensation. The bulk of the reduction in total compensation derives from the decline in value of stock option grants, which we argue is due to a change in the opportunistic timing of option grants. We define "lucky" grants as those with grant prices below or at the lowest stock price of the grant month, and we find that the proportion of lucky grants for financially distressed firms is higher before insolvency and lower upon and after insolvency, while the proportion for similar but solvent firms remains stable throughout the period. We interpret this evidence as consistent with a decrease in managerial power induced by a tightening in the "outrage" constraint due to the episode of financial distress.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 3857.
Length: 43 pages
Date of creation: Nov 2008
Date of revision:
Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Other versions of this item:
- Oscar Mitnik & Qiang Kang, 2008. "Not So Lucky Any More: CEO Compensation in Financially Distressed Firms," Working Papers 0906, University of Miami, Department of Economics.
- G30 - Financial Economics - - Corporate Finance and Governance - - - General
- J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
- M52 - Business Administration and Business Economics; Marketing; Accounting - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects
This paper has been announced in the following NEP Reports:
- NEP-ALL-2008-12-07 (All new papers)
- NEP-BEC-2008-12-07 (Business Economics)
- NEP-CFN-2008-12-07 (Corporate Finance)
- NEP-LAB-2008-12-07 (Labour Economics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Heckman, J.J. & Hotz, V.J., 1988.
"Choosing Among Alternative Nonexperimental Methods For Estimating The Impact Of Social Programs: The Case Of Manpower Training,"
University of Chicago - Economics Research Center
88-12, Chicago - Economics Research Center.
- James J. Heckman, 1989. "Choosing Among Alternative Nonexperimental Methods for Estimating the Impact of Social Programs: The Case of Manpower Training," NBER Working Papers 2861, National Bureau of Economic Research, Inc.
- Abadie, Alberto & Imbens, Guido W., 2011. "Bias-Corrected Matching Estimators for Average Treatment Effects," Journal of Business & Economic Statistics, American Statistical Association, vol. 29(1), pages 1-11.
- Bebchuk, Lucian Arye & Fried, Jesse, 2003.
"Executive Compensation as an Agency Problem,"
CEPR Discussion Papers
3961, C.E.P.R. Discussion Papers.
- Haubrich, Joseph G, 1994.
"Risk Aversion, Performance Pay, and the Principal-Agent Problem,"
Journal of Political Economy,
University of Chicago Press, vol. 102(2), pages 258-76, April.
- Joseph G. Haubrich, 1991. "Risk aversion, performance pay, and the principal-agent problem," Working Paper 9118, Federal Reserve Bank of Cleveland.
- Steven N. Kaplan & Bernadette Minton, 2006.
"How has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs,"
NBER Working Papers
12465, National Bureau of Economic Research, Inc.
- Kaplan, Steven N. & Minton, Bernadette A., 2006. "How Has CEO Turnover Changed? Increasingly Performance Sensitive Boards and Increasingly Uneasy CEOs," Working Paper Series 2006-7, Ohio State University, Charles A. Dice Center for Research in Financial Economics.
- Rajesh K. Aggarwal & Andrew A. Samwick, 1999.
"The Other Side of the Trade-off: The Impact of Risk on Executive Compensation,"
Journal of Political Economy,
University of Chicago Press, vol. 107(1), pages 65-105, February.
- Rajesh Aggarwal & Andrew A. Samwick, 1998. "The Other Side of the Tradeoff: The Impact of Risk on Executive Compensation," NBER Working Papers 6634, National Bureau of Economic Research, Inc.
- Gilson, Stuart C., 1989. "Management turnover and financial distress," Journal of Financial Economics, Elsevier, vol. 25(2), pages 241-262, December.
- Jenter, Dirk & Kanaan, Fadi, 2008.
"CEO Turnover and Relative Performance Evaluation,"
1992, Stanford University, Graduate School of Business.
- Lucian Bebchuk, 2005.
"The Growth of Executive Pay,"
Oxford Review of Economic Policy,
Oxford University Press, vol. 21(2), pages 283-303, Summer.
- Imbens, Guido & Abadie, Alberto, 2008.
"On the Failure of the Bootstrap for Matching Estimators,"
3043415, Harvard University Department of Economics.
- Alberto Abadie & Guido W. Imbens, 2008. "On the Failure of the Bootstrap for Matching Estimators," Econometrica, Econometric Society, vol. 76(6), pages 1537-1557, November.
- Alberto Abadie & Guido W. Imbens, 2006. "On the Failure of the Bootstrap for Matching Estimators," NBER Technical Working Papers 0325, National Bureau of Economic Research, Inc.
- Manuel Santos & Jorge Aseff, .
"Stock Options and Managerial Optimal Contracts,"
2133304, Department of Economics, W. P. Carey School of Business, Arizona State University.
- M. P. Narayanan & H. Nejat Seyhun, 2008. "The Dating Game: Do Managers Designate Option Grant Dates to Increase their Compensation?," Review of Financial Studies, Society for Financial Studies, vol. 21(5), pages 1907-1945, September.
- Warner, Jerold B. & Watts, Ross L. & Wruck, Karen H., 1988. "Stock prices and top management changes," Journal of Financial Economics, Elsevier, vol. 20(1-2), pages 461-492, January.
- Bebchuk, Lucian A. & Fried, Jesse M., 2003. "Executive Compensation as an Agency Problem," Berkeley Olin Program in Law & Economics, Working Paper Series qt81q3136r, Berkeley Olin Program in Law & Economics.
- Garvey, Gerald T. & Milbourn, Todd T., 2006. "Asymmetric benchmarking in compensation: Executives are rewarded for good luck but not penalized for bad," Journal of Financial Economics, Elsevier, vol. 82(1), pages 197-225, October.
- Alberto Abadie & David Drukker & Jane Leber Herr & Guido W. Imbens, 2004. "Implementing matching estimators for average treatment effects in Stata," Stata Journal, StataCorp LP, vol. 4(3), pages 290-311, September.
- Gilson, Stuart C & Vetsuypens, Michael R, 1993. " CEO Compensation in Financially Distressed Firms: An Empirical Analysis," Journal of Finance, American Finance Association, vol. 48(2), pages 425-58, June.
- Alberto Abadie & Guido W. Imbens, 2006. "Large Sample Properties of Matching Estimators for Average Treatment Effects," Econometrica, Econometric Society, vol. 74(1), pages 235-267, 01.
- Marianne Bertrand & Sendhil Mullainathan, 2001. "Are Ceos Rewarded For Luck? The Ones Without Principals Are," The Quarterly Journal of Economics, MIT Press, vol. 116(3), pages 901-932, August.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).
If references are entirely missing, you can add them using this form.