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CEO Power and Compensation in Financially Distressed Firms

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  • Qiang Kang

    ()
    (Department of Finance, University of Miami)

  • Oscar A. Mitnik

    ()
    (Department of Economics, University of Miami)

Abstract

We study the changes in CEO power and compensation that arise when firms go through financial distress. We use a matching estimator to identify suitable controls and estimate the causal effects of financial distress for a sample of U.S. public companies from 1992 to 2005. We document that, relative to those in control firms, the CEOs of distressed firms experience significant reductions in total compensation; the bulk of this reduction derives from the decline in value of new grants of stock options. These results hold not only for incumbent CEOs but also, surprisingly, for newly hired CEOs. Financial distress has important consequences on corporate governance, decreasing managerial influence over the board. We find that, among distressed firms, there is a significant decrease in the proportion of CEOs holding board chairmanship, and in the fractions of executives serving as directors or in the compensation committee of the board. We also show that periods of financial distress are associated with a decrease in opportunistic timing behavior of stock option awards. The results are suggestive of a link between managerial power and executive compensation.

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File URL: http://moya.bus.miami.edu/~omitnik/PDF_Documents/CEO_Comp_distress.pdf
File Function: First version, 2009
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Bibliographic Info

Paper provided by University of Miami, Department of Economics in its series Working Papers with number 2010-2.

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Length: 45 pages
Date of creation: Nov 2009
Date of revision:
Publication status: Published
Handle: RePEc:mia:wpaper:2010-2

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Related research

Keywords: CEO compensation; financial distress; lucky grants; managerial influence; bias-corrected matching estimators;

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