File Name: ceo turnover and relative performance evaluation .zip
Metrics details. The rise in the level of executive compensation in international banking in the last two decades has been striking.
At the same time, corporate declarations of relative performance evaluation RPE have enjoyed widespread popularity. In this paper, we test for evidence of RPE in international banking and pay particular attention to banks that openly disclose its use.
To that end, we collect compensation data on 46 large international banks. Taken as a whole, our sample shows moderate evidence consistent with RPE. We report stronger evidence once we investigate the subsample of RPE-disclosing banks.
These results hold up to a series of robustness checks. In addition, we find that the use of RPE is positively related to firm size and negatively related to growth options. Two of these banks—Lehman Brothers and Bear Stearns—collapsed in According to Bebchuk et al. Switzerland was not exempt. In , UBS paid out 70 million Swiss Francs to the members of its executive committees despite a 2. It stands to reason that the effectiveness of such compensation schemes have since become subject of ever more heated discussions, not least in international banking.
The recent rise in executive compensation has not been confined to the banking industry. Other industries have been following the same trend.
This general development has also piqued the interest of economists, who are intrigued by the underlying pay-setting mechanism. Executive compensation is a classic example of a principal-agent problem and lies at the heart of the controversy of corporate separation of ownership and control Jensen and Meckling Put succinctly, the challenge lies in motivating the CEO the agent to act in the best interest of the shareholder the principal.
This invokes a moral hazard problem. There has been much discussion about how firms are to solve this agency problem Ross ; Gjesdal ; Mahoney A straightforward solution would involve a compensation scheme which provides proper incentives for the CEO.
Economic intuition would suggest tying compensation to firm performance. However, firm performance is also influenced by a myriad of factors that are beyond the control of the agent. This exogeneity introduces undesirable risk into contracting.
This is where relative performance evaluation RPE comes in Holmstrom RPE implies that compensation contracts should be linked to firm performance in relation to peers with similar characteristics.
At the same time, RPE contracts offer the same incentives as contracts based on absolute performance. For shareholders, knowing that RPE is implemented is of particular importance because the mechanism creates incentives for CEOs to increase shareholder wealth. Footnote 1 The case for employing RPE in executive compensation contracts, then, seems clear-cut.
Indeed, RPE has become seemingly popular in practice. In this paper, we test for the existence of RPE in international banking and pay particular attention to banks that claim to purport its application.
For banks might have incentives to misreport RPE practice if their board of directors are prone to managerial influence. Board members might want to appease executives rather than constrain them.
For example, managers of large banks in particular usually enjoy a good reputation inside and outside of the bank, which could be beneficial for the members of the board. Bebchuk and Fried ; note that managers also enjoy great authority within the company, rendering conflict less appealing.
Designs of executive compensation schemes endorsed by the board of directors might thus succumb to this pressure. This is not without corporate risk. This criticism can be avoided by camouflaging compensation packages.
Footnote 2 Camouflaging the peer group of an underperforming bank manager would make excessive pay more acceptable to the public and investors. In other words, we might want to be cautious of flaunting RPE statements; some banks might want to avoid evaluating the actual performance of their underperforming manager relative to an appropriate peer group and instead pick particularly low-performing peers. RPE has been investigated empirically. Most studies try to infer its usage by regressing executive compensation on the performance of a target firm and some measure of peer group performance.
A negative and statistically significant coefficient on peer performance is taken as indication that common shocks are being removed from compensation contracts, constituting evidence of RPE.
The scope of the existing literature is rather limited. The focus lies on compensation practices of industrial firms, typically in the USA. Footnote 3 This regional limitation has its reasons. It is difficult to obtain comprehensive data on executive compensation outside of the USA. Despite the ubiquitously proclaimed use of RPE in practice, the empirical results of the literature have been a mixed bag.
Footnote 4 This is partly owed to the fact that the post hoc construction of peer groups is fraught with issues. If researchers identify a different peer group than the target firm itself had actually used, inferences on RPE are no longer meaningful.
Correct identification is one reason why one may fail to find evidence of RPE. A simpler explanation would be that the RPE claims are merely empty rhetoric to appease stakeholders. As Albuquerque puts it, any empirical tests of RPE are, in this sense, joint tests.
This paper embraces this duality and tests for RPE in a new sample of large and globally operating non-U. Footnote 5 We contend that the global banking industry is an ideal playground to test the usage of RPE, for at least three reasons. First, RPE makes especially sense for firms that are exposed to common shocks. This applies particularly well to international banking. The main reason for this exposure is that banks are highly leveraged institutions.
Around 90 percent of their assets come from debt, making them more prone to exogenous volatility Houston and James ; Chen et al. Second, the barriers to global integration in the banking industry have been significantly trimmed in the last two decades, shifting banks from once centralized domestic organizations to global behemoths. In turn, the structure of competition in the industry has adjusted Berger and Smith Large banks operating on the international level are now dealing with intense competition.
Footnote 6 Third, the recent financial crisis was characterized by failures of large international banks such as Bear Stearns or Lehman Brothers. The downfall of these banks has drawn increasing attention to corporate governance issues in remuneration policy. Footnote 7 If anything, this pressure has prompted banks to make more efficient use of RPE. Our study tackles the caveat that the soundness of empirical tests on RPE critically hinges on the correct identification of the peer groups.
Aggregating in this manner accounts for the observation that industry affiliation and firm size are informative proxies for the common market risks that RPE-setting firms face. Our study also deals with the potential issue of RPE being corporate window dressing, with the firm not actually engaging in RPE. If that were the case then signaling the disclosure of peer group usage would be mere noise, and incorporating this information should not alter our results qualitatively.
To test this hypothesis, we differentiate between disclosing and non-disclosing banks. Footnote 8. We collect a new data set with information on 46 large international banks. The results of our basic regression specification document negative and insignificant parameter estimates in industry peers. Taken by itself, this casts doubt on the use of RPE in our sample. In restricting attention to the subsample of disclosing banks, we find stronger and more conclusive evidence that systematic risk is filtered out from CEO compensation.
Strong-form RPE tests support this conclusion. This result stands in contrast to Gong et al. Footnote 9 To gain more insight, we disentangle potential factors related to RPE usage. A logistic regression indicates that firm size, and, to a smaller extent, growth options are associated with RPE usage.
The results imply that the greater a bank is, the higher is the probability that it will use RPE in its compensation contracts.
On the other hand, the probability of using RPE decreases with the magnitude of growth options. Our paper contributes to the ongoing discussion on RPE along several dimensions. This is hard to square with an industry that is characterized by pronounced international competition. We provide broader evidence by conducting tests on a newly collected sample of large international banks. We also shed new light on the informative value of disclosure. Our results withstand several robustness tests and suggest that the banks in our sample which proclaim the use of peers in assessing the performance of their CEOs are not merely window dressing: we do find stronger evidence for RPE usage among disclosing banks.
This indicates that lumping together disclosing and non-disclosing firms can be detrimental to the conclusiveness of RPE tests. Finally, we examine the association of several bank characteristics with the intensity of RPE usage. The rest of the paper is organized as follows. This section also introduces the empirical model and depicts the peer group construction mechanism.
The last section concludes. The literature on executive compensation in banking attends to the particularities of the industry. First, banks have a peculiar capital structure. They hold much less equity than other companies, rendering them highly leveraged. Second, the presence of federal guarantees of bank deposits, a public measure to protect private depositors from losses in case of insolvency, distinguishes banks from other firms.
Against this background, the literature addresses three main topics Houston and James Two other studies test whether the existing compensation policies promote risk-taking in the US banking sector by examining the relation between the specific component of the compensation and market measures of risk Houston and James ; Chen et al. They regress the growth rate of real compensation on the average of the real total rate of return from the current and previous period, the first difference of accounting-based returns, regional averages for both accounting-based return, and the average of the real total rate of return.
Skip to search form Skip to main content You are currently offline. Some features of the site may not work correctly. DOI: Eisfeldt and Camelia M. Eisfeldt , Camelia M.
This article examines the empirical relation between CEO turnover and earnings management in Korea using a sample of CEO turnovers and non-turnover control firms during the period of We classify CEO turnovers into four types depending on whether the departure of outgoing CEO is peaceful or forced and the incoming CEO is promoted from within or recruited from outside the firm. We measure earnings management by both discretionary accruals and real activities management. After controlling for corporate financial performance and governance structure, we find upward earnings management by the departing CEO only when the departure is forced and the new CEO is an insider. In this case, the new CEO also engages in downward earnings management using both discretionary accruals and real activities management. We also find some evidence that the new CEO recruited from outside the firm manages discretionary accruals upward following the peaceful departure of predecessor. Agrawal, A.
This paper shows that CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate.
Previous research presents extensive conclusive results regarding the association between firm performance and CEO turnover. The principle objective of this study is to investigate whether the likelihood of the CEOs turnover is inversely correlated with the IPO performance of the firm. This study is conducted by employing the U. Free Full-text PDF.
Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new hand-collected sample of 1, CEO turnovers from to , we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent.
Mardianto, Willy Arafah, This study aims to explore the antecedent factors of CEO turnover rates in Indonesia and their impact on the performance of companies listed on the Indonesia Stock Exchange. The originality of this study was to use political connection as one of the antecedents to measure the consequences of CEO turnover in influencing company performance. Very little research in Indonesia or in ASEAN countries uses CEO turnover as a mediating variable in measuring the relationship between political connection and company performance.
This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new hand-collected sample of 1, CEO turnovers from to , we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent.
The paper aims to revisit the topic of relative performance evaluation RPE of top management using a large panel of community banks. This allowed the authors to better estimate the benchmark performance relative to which bank executives should be evaluated under RPE. Moreover, bank regulatory evaluations allowed the authors to control for the impact of poor governance. The paper shows that penalizing executives for poor performance arising from economic downturns is not necessarily inconsistent with the theory. The analysis suggests that executive dismissals during adverse economic conditions are not necessarily a result of bad luck; rather, the analysis implies that bad times are informative about management quality. The main practical implication is that both relative and absolute performance should be incorporated in the incentive structure of bank executives. The paper shows that the assumptions used in prior RPE studies may not be applicable to top executives which could explain the inconsistency between the theory and the empirical evidence.
ABSTRACT This paper shows that CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory.
Беккер легонько обнял. Девушка высвободилась из его рук, и тут он снова увидел ее локоть. Она проследила за его взглядом, прикованным к синеватой сыпи. - Ужас, правда. Беккер кивнул.
Утечка прекратилась! - крикнул техник. - Вторжение прекращено. Наверху, на экране ВР, возникла первая из пяти защитных стен. Черные атакующие линии начали исчезать.
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