THREE ESSAYS ON MANAGERIAL INCENTIVES
Analytics
216 views ◎200 downloads ⇓
Abstract
The dissertation consists of three essays. The first essay examines how a tournament among CEOs to progress within the CEO labor market changes their tendency toward corporate hedging policies. We exploit the textual analysis of 10-Ks to generate corporate hedging proxies. We find that the likelihood and intensity to hedge increases as the CEO labor market tournament prizes augment. We explore the mitigating impacts of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, which could be the possible reasons for the relation. Also, the relation between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and when CEOs are the founders or of retirement age. We identify a causal relation between ITIs and corporate hedging by using an instrumental variable approach and an exogenous shock sourced by the changes in the enforceability of non-competition agreements across states.In the second essay, the effects of internal tournament incentives (ITTIs) on reserve management, performance and risk-taking in property-liability insurance firms are studied. We find that a positive relation between ITTIs and reserve errors, implying that a higher tournament prize is associated with more conservative loss reserve management. Unlike the literature on non-financial firms, we do not find a positive relation between ITTIs and risk-taking behavior or performance. The overall evidence indicates that VPs in tournaments focus on the strong financial health, not performance. Moreover, we find the positive impact of ITTIs on conservative reserve management is more pronounced for larger, financially weaker and more geographically focused firms, and is mitigated for insurers with a higher percentage of claim loss reserve over total liability. Our results also suggest that the Sarbanes Oxley Act does not significantly impact reserve behaviors of executives. Finally, we find that insurers with more independent board members are likely to have more conservative reserve behavior in internal tournaments. In the third essay, we investigate the relation between executive pay duration and the cost of debt. We find a positive relation between equity-based pay duration (Equity PD) and loan spread, implying that loan spread is increasing in a larger Equity PD. However, we explore a negative relation between equity&debt-based pay duration (Whole PD) and loan spread, which shows that debt-like compensation contributes to the agency conflict between managers and creditors not only through their sizes but also through their durations. Also, we illustrate that the executive labor market is a channel that drives the relations of both Equity PD and Whole PD with the cost of debt. Risk and information asymmetry channels are the other channels through which Equity PD impacts the cost of debt. Lastly, we show the association between Whole PD and borrowing costs is more pronounced for firms with better corporate governance and past performance.