Knowledge that Transforms

ABSTRACT We examine the importance of bonus contract characteristics, specifically, with respect to the relation between EPS-based bonuses and share repurchases. We find that managers are more (less) likely to repurchase shares and spend more (less) on repurchases when as-if EPS just misses (exceeds) the bonus threshold (maximum) EPS level. We find no such relation when as-if EPS is further below the threshold. We find weak evidence that managers of firms with as-if EPS just below the EPS target are more likely to repurchase shares and spend more on repurchases relative to firms with as-if EPS just above the EPS target. We further find that the incentive-zone slopes specified in the bonus contracts are positively associated with share repurchases. Managers making bonus-motivated repurchases do so at a higher cost. Together, our results highlight the importance of compensation design in motivating managers' behavior and aligning managers' incentives with shareholders. JEL Classifications: M41; M52.

ABSTRACT This study investigates whether Information Technology (IT) reputation, captured by the accumulation of consistent IT capability signals, influences bank loan contracting even though banks have access to inside information. We predict that IT reputation is associated with better loan terms because it lowers credit risk via its impact on default and information risks. Results based on 4,218 loan facility-years reveal, as predicted, that firms with a reputation for IT capability tend to have more favorable price and non-price terms for loan contracts and are less likely to have their credit rating downgraded or to report internal control weaknesses than firms with no IT reputation. The study contributes to the banking and IT business value literature by showing that banks incorporate borrowers' nonfinancial characteristics, such as IT reputation, into loan contracting terms. JEL Classifications: G21; G32; M41; O32. Data Availability: All data are available from sources identified in the study.