Deferred compensation, risk, and company value: investor reactions to CEO incentives

Chenyang Wei and David Yermack

No 445, Staff Reports from Federal Reserve Bank of New York

Abstract: Many commentators have suggested that companies pay top executives with deferred compensation, a type of incentive known as inside debt. Recent SEC disclosure reforms greatly increased the transparency of deferred compensation. We investigate stockholder and bondholder reactions to companies' initial reports of their CEOs' inside debt positions in early 2007, when new disclosure rules took effect. We find that bond prices rise, equity prices fall, and the volatility of both securities drops upon disclosures by firms whose CEOs have sizable defined benefit pensions or deferred compensation. Similar changes in value occur for credit default swap spreads and exchange-traded options. The results indicate a reduction in firm risk, a transfer of value from equity toward debt, and an overall destruction of enterprise value when a CEO's deferred compensation holdings are large.

Keywords: Executives - Salaries; Defined benefit pension plans; Chief executive officers; options; Corporations - Finance; Disclosure of information (search for similar items in EconPapers)
Date: 2010
New Economics Papers: this item is included in nep-bec and nep-lab
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