Deferred Compensation, Risk, and Company Value: Investor Reactions to CEO Incentives - Federal Reserve Bank of New York

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Deferred Compensation, Risk, and Company Value:
Investor Reactions to CEO Incentives

2014 April 2010 Number 445

JEL classification: G14, G32

Authors: Chenyang Wei and David Yermack

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.

Available only in PDF pdf

37 pages / 200 kb

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