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Inducement grants, hiring announcements, and adverse selection for new CEOs

Author

Listed:
  • Brian Cadman

    (University of Utah)

  • Richard Carrizosa

    (University of Texas at El Paso)

  • Xiaoxia Peng

    (University of Utah)

Abstract

We examine how adverse selection problems when hiring new external CEOs affect contractual features of inducement grants. Focusing on the sensitivity of inducement grants to the new CEO announcement return ($Sensitivity), we find that firms provide inducement grants that are more sensitive to the new CEO announcement return when information asymmetry about the new CEO is more severe and the costs of adverse selection problems are higher. We also find a positive relation between the market reaction to the appointment and $Sensitivity. We consider factors that reduce information asymmetry (e.g., engaging a search firm or appointing internal CEOs) and find they are associated with lower sensitivity of the inducement grant to the announcement.

Suggested Citation

  • Brian Cadman & Richard Carrizosa & Xiaoxia Peng, 2020. "Inducement grants, hiring announcements, and adverse selection for new CEOs," Review of Accounting Studies, Springer, vol. 25(1), pages 279-312, March.
  • Handle: RePEc:spr:reaccs:v:25:y:2020:i:1:d:10.1007_s11142-019-09517-9
    DOI: 10.1007/s11142-019-09517-9
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    More about this item

    Keywords

    Inducement grants; CEO turnover; Adverse selection;
    All these keywords.

    JEL classification:

    • J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods
    • M12 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Business Administration - - - Personnel Management; Executives; Executive Compensation
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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