[We examine the role of board connections in explaining how the controversial practice of backdating employee stock options spread to a large number of firms across a wide range of industries. The increase in the likelihood that a firm begins to backdate stock options that can be explained by having a board member who is interlocked to a previously identified backdating firm is approximately one-third of the unconditional probability of backdating in our sample. Our analysis provides new insight into how boards function and the role that they play in providing managerial oversight and determining corporate strategy.]

We study the implications for shareholder wealth of interfirm antitrust litigation and how the costs of the dispute affect the propensity to settle. Upon filing, defendants experience significant wealth losses that are ten million dollars larger than the wealth gains of plaintiffs. Financial distress, behavioral constraints, and follow-on suits are sources of wealth leakage and influence settlement behavior. Since the threat of a monetary transfer has little power to explain either wealth effects or the likelihood of settlement, the central concern of defendants may be the potential prohibition of profitable business practices.

[We assemble a sample of 983 equity-based awards that include either an accelerated-or a contingent-vesting provision tied to firm performance and explore the frequency, contractual nature, usage, and implications of such awards. We find that performance-vesting (p-v) provisions specify meaningful performance hurdles and provide significant incentives for executives. The propensity to use p-v provisions is positively related to the arrival of a new CEO and the proportion of outsiders on the board of directors and negatively related to prior stock performance. Performance-vesting firms have significantly better subsequent operating performance than control firms. Abnormal accounting performance does not arise from earnings management or discernible differences in financial or investment policy.]

John M. Bizjak, Christopher J. Marquette, Are Shareholder Proposals All Bark and No Bite? Evidence from Shareholder Resolutions to Rescind Poison Pills, The Journal of Financial and Quantitative Analysis, Vol. 33, No. 4 (Dec., 1998), pp. 499-521

Companies can potentially use compensation peer groups to inflate pay by choosing peers that are larger, choosing a high target pay percentile, or choosing peer firms with high pay. Although peers are largely selected based on characteristics that reflect the labor market for managerial talent, we find that peer groups are constructed in a manner that biases compensation upward, particularly in firms outside the Standard & Poor's (S&P) 500. Pay increases close only about one-third of the gap between the pay of the Chief Executive Officer (CEO) and the peer group, however, suggesting that boards exercise discretion in adjusting compensation. Preliminary evidence suggests that increased disclosure has reduced the biases in peer group choice.

Motivated by the potential for opportunistic behavior in pay decisions, recent SEC and IRS regulations essentially preclude inside directors from serving on a firm’s compensation committee (CC). We examine whether greater CC independence promotes shareholder interests and whether the CEO’s presence on the CC leads to opportunistic pay structure. We find little evidence that greater committee independence affects executive pay. Moreover, committees consisting of insiders or the CEO do not award excessive pay or lower overall incentives. For example, we find no evidence that pay decreases or total incentives increase when CEOs come off the CC. Our results suggest that regulations governing committee structure may not reduce levels of pay or achieve efficiencies in incentive contracts.

Relative performance (RPE) awards have become an important component of executive compensation. We examine whether RPE awards, particularly the peer group, are structured in a manner consistent with economic theory. For RPE awards using a custom peer group, we find that the custom group is significantly more effective than four plausible alternative peer groups at filtering out common shocks, lowering the cost of compensation, and increasing managerial incentives. For RPE awards using a market index, we find some evidence that firms could have selected a custom set of peers with better filtering properties at a lower cost with similar incentives. For example, firms could have saved around $118,000 in present value terms, on average, for an RPE award had they chosen a custom group comprising of their product market peers instead of a market index.

J. Carr Bettis, John M. Bizjak, Michael L. Lemmon, Managerial Ownership, Incentive Contracting, and the Use of Zero-Cost Collars and Equity Swaps by Corporate Insiders, The Journal of Financial and Quantitative Analysis, Vol. 36, No. 3 (Sep., 2001), pp. 345-370

Many of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching models all indicate that clawback provisions decrease the volatility of stock returns. The channels that connect clawback presence to firm risk include more conservative investment and financial policies. The clawback-induced reduction in risk-taking appears to benefit shareholders on average. The gains from reduced risk-taking are larger for firms with fewer growth options, lower R&D, and prior wrongdoing.