Three Essays on Managerial Compensation
In the first chapter titled "CEOs’ Capital Gains Tax Liabilities and Accounting Conservatism", I study whether CEOs’ tax liability affect conservative accounting policy. Recent studies show that the tax-induced lock-in effect discourages CEOs’ to unwind their unrestricted equity and subsequently exacerbates their risk-aversion. I investigate how CEOs’ unrealized capital gains tax liabilities (tax burdens) influence financial reporting conservatism. I find that the demand for accounting conservatism decreases with CEO tax burdens. Further analyses show that the negative relation between CEO tax burden and conservatism is stronger when the firm has high leverage, high default risk, and when the CEO’s incentives are more aligned with equityholders. This highlights the shareholder-creditor agency conflicts mitigation role of CEO tax burdens in reducing creditors’ demand for conservatism. I exploit the Federal Taxpayer Reform Act of 1997 and staggered state-level tax cuts that significantly decreased personal capital gains tax rates as identification strategies. I find a significant increase in conservative reporting following the federal and state tax cuts in firms with higher CEO tax burdens before these tax cuts.In the second chapter titled "Industry Tournament Incentives and Corporate Innovation Strategies", we examine how the tournament-like progression in the CEO labor market influences corporate innovation strategies. By exploiting a text-based proxy for product innovation based on product descriptions from 10-Ks, we find a positive and significant relation between industry tournament incentives (ITIs) and product innovation. We then explore the trade-off effects of ITIs on product innovation created through long-term patenting technologies and short-term product development. We discover that ITIs strengthen short-term innovation but decrease patent-based innovation. Further analyses show that the effect of ITIs on product innovation is stronger when the product market is more competitive and when CEO characteristics indicate a higher probability of winning the tournament prize.Lastly, my third chapter titled "Industry Tournament Incentives and Corporate Hedging Policies" studies how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor-market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of non-competition agreements across states.