Research output: Contribution to Journal/Magazine › Journal article › peer-review
Research output: Contribution to Journal/Magazine › Journal article › peer-review
}
TY - JOUR
T1 - Performance periods in CEO performance-based equity awards
T2 - theory and evidence
AU - Evans III, John Harry
AU - Gao, Zhan
AU - Hwang, Yuhchang
AU - Wu, Wan-Ting
PY - 2018/3/1
Y1 - 2018/3/1
N2 - This paper examines the length of time over which CEO performance is evaluated (the “performance period”) in CEO performance-based equity awards (PBEAs). Departing from the primary emphasis of agency theory on moral hazard problems, we develop a model in which short performance periods are instrumental in sorting CEO talents. The model predicts that short performance periods are preferred when CEOs have low expected productivity or valuable alternative employment opportunities, and when firms face high operating uncertainty or high dispersion of managerial productivity. We find empirical support for these predictions in a sample of S&P 1500 industrial firms granting PBEAs to CEOs. We also document that CEO turnover is higher for underperforming CEOs with shorter performance periods, validating the sorting role of performance periods.
AB - This paper examines the length of time over which CEO performance is evaluated (the “performance period”) in CEO performance-based equity awards (PBEAs). Departing from the primary emphasis of agency theory on moral hazard problems, we develop a model in which short performance periods are instrumental in sorting CEO talents. The model predicts that short performance periods are preferred when CEOs have low expected productivity or valuable alternative employment opportunities, and when firms face high operating uncertainty or high dispersion of managerial productivity. We find empirical support for these predictions in a sample of S&P 1500 industrial firms granting PBEAs to CEOs. We also document that CEO turnover is higher for underperforming CEOs with shorter performance periods, validating the sorting role of performance periods.
KW - performance period
KW - sorting
KW - performance vesting
KW - CEO compensation
KW - corporate governance
KW - CEO turnover
U2 - 10.2308/accr-51839
DO - 10.2308/accr-51839
M3 - Journal article
VL - 93
SP - 161
EP - 190
JO - The Accounting Review
JF - The Accounting Review
SN - 0001-4826
IS - 2
ER -