Inducement Grants, Hiring Announcements and Adverse Selection for New CEOs

We examine how adverse selection problems when hiring new external CEOs affect contractual features of inducement grants. Focusing on the sensitivity of inducement grants to the new CEO announcement return ($Sensitivity), we find that firms provide inducement grants that are more sensitive to the new CEO announcement return when information asymmetry about the new CEO is more severe and the costs of adverse selection problems are higher. We also find a positive relation between the market reaction to the appointment and $Sensitivity. We consider factors that reduce information asymmetry (engaging a search firm or appointing internal CEOs) and find they are associated with lower sensitivity of the inducement grant to the announcement.

Keywords: Inducement Grants, CEO turnover, Adverse Selection

JEL Classification: J33, M12, M52

Suggested Citation: Suggested Citation

Cadman, Brian D. and Carrizosa, Richard and Peng, Xiaoxia, Inducement Grants, Hiring Announcements and Adverse Selection for New CEOs (March 2019). Review of Accounting Studies, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2790987 or http://dx.doi.org/10.2139/ssrn.2790987