Essays on executive compensation

Li, Xia ORCID: 0000-0003-4300-6595 (2023). Essays on executive compensation. University of Birmingham. Ph.D.

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Abstract

Agency theory suggests that monetary incentives are effective mechanisms to align managers’ and shareholders’ interests. Specifically, this thesis supports that monetary incentives play a crucial role in promoting value-maximizing managerial decisions. To attain this objective, this thesis is organized into three essays that consider the monitoring mechanisms involved in executive compensation and agency theory, with the aim of providing a comprehensive understanding of the subject matter.
The first essay examines the effect of earnings management (EM) on CEOs’ abnormal compensation (ACOMP). The literature examining the relation between CEOs’ total compensation and EM remains inconclusive, which may be due to the unobserved determinants of executive compensation. In line with the predictions of agency theory, I provide conclusive evidence of this relation by documenting a negative relation between ACOMP (the proportion of pay that cannot be accurately determined by known factors) and EM. Suggesting that CEOs involved in EM are penalized in form of reduced excess compensation. The results also confirm that CEOs involved in higher levels of real earnings management (REM) are penalized more severely than CEOs involved in higher levels of accrual earnings management (AEM). It also documents that, the relation between ACOMP and AEM is exacerbated in firms facing financial stress.

The second essay examines the relation between analysts’ forecasts or recommendations metrics and CEOs’ ACOMP. Among the limited studies, that explore the relation between analysts’ favourable forecasts or recommendations and CEOs’ compensation, report mixed results. Instead of total compensation, I use CEOs’ ACOMP to reinvestigate this relation and find conclusive evidence of its negative association with several unfavourable analysts’ forecasts and recommendation metrics. It appears that this relation is primarily driven by firms that are subjected to stronger external monitoring mechanisms.

The third essay reports that the average cash flow risk (CFR) of firms in the United States firms shows a significantly increasing trend over the past four decades. The CFR also increases dramatically for firms approaching financial distress or bankruptcy, suggesting its important role in predicting a firm’s failure. Empirically, I find that CFR has a strong positive effect on a firm’s financial distress likelihood. In line with the upper echelons theory and the agency theory, I also find that the association between CFR and financial distress is negatively moderated in firms with high EM and ACOMP.

Type of Work:

Thesis (Doctorates > Ph.D.)

Award Type:

Doctorates > Ph.D.

Supervisor(s):