Review of Finance Advance Access originally published online on January 31, 2007
Review of Finance 2008 12(1):141-184; doi:10.1093/rof/rfl003
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Executive pay and shareholder litigation*
1 Zicklin School of Business, Baruch College, Columbia University
2 School of International and Public Affairs, Columbia University
The paper examines the impact of executive compensation on private securities litigation. We find that incentive pay in the form of options increases the probability of securities class action litigation, holding constant a wide range of firm characteristics. We further document that there is abnormal upward earnings manipulation during litigation class periods and that insiders exercise more options and sell more shares during class periods, but that this activity is largely driven by pre-existing option holdings of the managers. Our results suggest that option-based compensation may have the unintended side effect of giving executives an incentive to focus excessively on the short term share price.
JEL Classification: G30, G34, J33, K22, M41
* We thank Donal Byard, Jonathan Berk, Patrick Bolton, Larry DuCharme, Gong Ning, Bronwyn Hall, Michelle Hanlon, David Hirshleifer, Armen Hovakimian, Shane Johnson, Andrew Karolyi, Hayne Leland, Ying Li, Paul H. Malatesta, Burton Malkiel, John Morgan, Doron Nissim, Theo Nijman, Mitchell Petersen, D. Shores, René Stulz, Siew Hong Teoh, Karen Wruck, Wei Xiong, Josef Zechner (the editor) and two anonymous referees for helpful comments and suggestions. We also benefited from the comments of participants in seminars at Studienzentrum Gerzensee-CEPR European Summer Symposium in Financial Markets, The Financial Intermediation Society Conference, Princeton University, Baruch College, Tilburg University, UC Berkeley, University of Hong Kong, Columbia University, Ohio State University, Northwestern University, University of Chicago, Boston College, Boston University, Washington University at Seattle, AFA and WFA 2005. We thank Susan French and Juan Carlos Sanchez for very helpful discussions of the litigation data. Lin Peng thanks the Eugene Lang Junior Faculty Research Fellowship and the PSC-CUNY Research Foundation for financial support. All errors remain our responsibility.
CiteULike 
Connotea 
Del.icio.us What's this?
This article has been cited by other articles:
|
|
 |
|
  T. H. Noe Tunnel-Proofing the Executive Suite: Transparency, Temptation, and the Design of Executive Compensation Rev. Financ. Stud., December 1, 2009; 22(12): 4849 - 4880. [Abstract] [Full Text] [PDF]
|
|
|
|
 |
|
 S. A. Johnson, H. E. Ryan Jr., and Y. S. Tian Managerial Incentives and Corporate Fraud: The Sources of Incentives Matter Review of Finance, January 1, 2009; 13(1): 115 - 145. [Abstract] [Full Text] [PDF]
|
|