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Do executives get more pay prior to deteriorations of firm performance?

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Title: Do executives get more pay prior to deteriorations of firm performance?
Author(s): Wu, Yu-Ching
Director of Research: Chen, Xiaoling
Doctoral Committee Chair(s): Sougiannis, Theodore; Chen, Xiaoling
Doctoral Committee Member(s): Almeida, Heitor; Li, Yue; FArrell, Anne M.
Department / Program: Accountancy
Discipline: Accountancy
Degree Granting Institution: University of Illinois at Urbana-Champaign
Degree: Ph.D.
Genre: Dissertation
Subject(s): executive compensation private information rent extraction managerial power theory
Abstract: I examine whether executives obtain more direct compensation from their companies in anticipation of deteriorations of firm performance. Using compensation data from S&P 1500 firms, I find that top managers receive more direct compensation in anticipation of the next year’s poor performance. The negative association between compensation and future performance is most significant in firm-years in which insiders sell large amounts of stock, or in which top managers exercise large amounts of options, both of which are signals of top managers’ foreknowledge about future poor performance. Moreover, this phenomenon is more significant in firms with more entrenched CEOs. I also find intensive scrutiny from active shareholders effectively mitigates such behavior. This finding supports the managerial rent-extraction, rather than efficient contracting, explanation for the negative association between current pay and future performance. Consequently, such rent-seeking behavior is followed by even poorer long-term operating and stock performance in the subsequent five years.
Issue Date: 2012-02-01
Rights Information: Copyright 2011 Yu-Ching Wu
Date Available in IDEALS: 2014-02-01
Date Deposited: 2011-12

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