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Executive compensation following a d...

Abbott, Lawrence James.

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Executive compensation following a decline in the investment opportunity set.

Record Type:	Electronic resources : Monograph/item
Title/Author:	Executive compensation following a decline in the investment opportunity set./
Author:	Abbott, Lawrence James.
Published:	Ann Arbor : ProQuest Dissertations & Theses, : 1998,
Description:	75 p.
Notes:	Source: Dissertations Abstracts International, Volume: 60-05, Section: A.
Contained By:	Dissertations Abstracts International60-05A.
Subject:	Studies. -
Online resource:	https://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=9900281
ISBN:	9780591970470

Executive compensation following a decline in the investment opportunity set.
Abbott, Lawrence James.

Executive compensation following a decline in the investment opportunity set. - Ann Arbor : ProQuest Dissertations & Theses, 1998 - 75 p.

Source: Dissertations Abstracts International, Volume: 60-05, Section: A.

Thesis (Ph.D.)--University of Oregon, 1998.

This item must not be sold to any third party vendors.

This paper examines executive compensation structure following a decline in the investment opportunity set (IOS). Previous theoretical literature, as well as previous cross-sectional empirical research by Gaver and Gaver (1993) and Baber, Janakiraman and Kang (1996), suggests firms that have experienced an IOS decline rebalance the incentive compensation structure for its CEOs. More specifically, it is hypothesized that such firms should increase the weight placed on accounting-based performance measures and decrease the weight placed on stock-based performance measures to achieve more efficient incentive alignment. The hypothesis is tested in a time-series setting. I identify 112 firms (83 firms in a reduced subsample) that have experienced two distinct 5-year periods: one with a high IOS, followed by (after a two-year interim period) one with a prolonged decline in that firm's IOS. I then compare the compensation structure response of test firms to a control set of firms which maintained a stable IOS over the same time period. I find that test firms increased the weight placed on stock-based performance measures and decreased the weight placed on accounting-based performance measures after the decline in their IOS. However, I also find that control firms readjusted their weights in a similar fashion and that the response of test firms was not significantly different than that of control firms. There are two interpretations of the results. One interpretation is there has been a general shift towards stock-based performance measures over time. However, why there would be such a time trend remains an empirical issue. A second interpretation is that firms with stagnant or declining investment opportunities take actions to encourage the replenishment or creation of investment opportunities. The second interpretation is partially consistent with the findings of Gaver (1992), who finds that firms with stagnant investment opportunity sets or that are undergoing strategic change are more likely to adopt performance plans. Gaver (1992) argues that performance plans do not have the short-term orientation that typical accounting-based bonus plans do and allow the CEO the time horizon necessary to make strategic changes (whose impact would not be immediately reflected in annual accounting earnings). As such, if test firms are undergoing strategic change and if the control set of firms actually proxy for firms with a stagnant IOS, this could also explain why both control and test firms had similar compensation structure responses over the same time frame.

ISBN: 9780591970470Subjects--Topical Terms:

3433795
Studies.
Subjects--Index Terms:

Compensation

Executive compensation following a decline in the investment opportunity set.
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245 1 0 $a Executive compensation following a decline in the investment opportunity set.
260 1 $a Ann Arbor : $b ProQuest Dissertations & Theses, $c 1998
300 $a 75 p.
500 $a Source: Dissertations Abstracts International, Volume: 60-05, Section: A.
500 $a Publisher info.: Dissertation/Thesis.
500 $a Advisor: Matsunaga, Steven R.
502 $a Thesis (Ph.D.)--University of Oregon, 1998.
506 $a This item must not be sold to any third party vendors.
506 $a This item must not be added to any third party search indexes.
520 $a This paper examines executive compensation structure following a decline in the investment opportunity set (IOS). Previous theoretical literature, as well as previous cross-sectional empirical research by Gaver and Gaver (1993) and Baber, Janakiraman and Kang (1996), suggests firms that have experienced an IOS decline rebalance the incentive compensation structure for its CEOs. More specifically, it is hypothesized that such firms should increase the weight placed on accounting-based performance measures and decrease the weight placed on stock-based performance measures to achieve more efficient incentive alignment. The hypothesis is tested in a time-series setting. I identify 112 firms (83 firms in a reduced subsample) that have experienced two distinct 5-year periods: one with a high IOS, followed by (after a two-year interim period) one with a prolonged decline in that firm's IOS. I then compare the compensation structure response of test firms to a control set of firms which maintained a stable IOS over the same time period. I find that test firms increased the weight placed on stock-based performance measures and decreased the weight placed on accounting-based performance measures after the decline in their IOS. However, I also find that control firms readjusted their weights in a similar fashion and that the response of test firms was not significantly different than that of control firms. There are two interpretations of the results. One interpretation is there has been a general shift towards stock-based performance measures over time. However, why there would be such a time trend remains an empirical issue. A second interpretation is that firms with stagnant or declining investment opportunities take actions to encourage the replenishment or creation of investment opportunities. The second interpretation is partially consistent with the findings of Gaver (1992), who finds that firms with stagnant investment opportunity sets or that are undergoing strategic change are more likely to adopt performance plans. Gaver (1992) argues that performance plans do not have the short-term orientation that typical accounting-based bonus plans do and allow the CEO the time horizon necessary to make strategic changes (whose impact would not be immediately reflected in annual accounting earnings). As such, if test firms are undergoing strategic change and if the control set of firms actually proxy for firms with a stagnant IOS, this could also explain why both control and test firms had similar compensation structure responses over the same time frame.
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650 4 $a Time series. $3 3561811
650 4 $a Business administration. $3 3168311
650 4 $a Finance. $3 542899
653 $a Compensation
653 $a Executive
653 $a Investment opportunity set
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710 2 $a University of Oregon. $3 958250
773 0 $t Dissertations Abstracts International $g 60-05A.
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856 4 0 $u https://pqdd.sinica.edu.tw/twdaoapp/servlet/advanced?query=9900281