CEO Personal Wealth, Equity Incentives and Firm Performance

Corporate Governance: An International Review, Forthcoming

47 Pages Posted: 16 Feb 2009 Last revised: 26 Aug 2012

See all articles by Anna Rossi

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance

Juha-Pekka Kallunki

University of Oulu - Department of Economics, Accounting and Finance

Henrik Nilsson

Umeå University

Petri Sahlström

University of Oulu

Date Written: July 30, 2012

Abstract

Manuscript Type: Empirical Research Question/Issue: In this paper, we explore the determinants and performance effects of a novel measure of executive incentives, that is, the elasticity of a CEO’s total wealth to firm performance, computed as a CEO’s ownership value relative to her total wealth.

Research Findings/Insights: Using unique data on the total personal wealth of the CEOs of listed Swedish firms we find that while CEOs typically own only a very small fraction of the shares of their firms, this ownership constitutes a significant part of their total wealth. We also find that a CEO’s total wealth elasticity is negatively associated with firm size and a CEO’s age and positively associated with a firm risk environment. As for the effect on firm performance, we find that higher CEO’s equity incentives enhance future accounting firm performance when we estimate panel data regressions by taking into account the dynamic nature of endogeneity between a CEO’s incentives and firm performance. We, however, do not find any evidence that a CEO’s equity incentives are related to future stock returns.

Theoretical/Academic Implications: Our analysis suggests that executives’ incentives when measured as price-performance elasticity are economically more significant than has been often argued in the literature (e.g. Bebchuk and Fried, 2004). Moreover, due to several advantages of price-performance elasticity over traditionally used fractional ownership and dollar-at-stake measures, the inferences drawn from this study with respect to determinants and performance implications of a CEO’s incentives may be superior to those from prior studies. The result on the relation between firm size and a CEO’s incentives is especially interesting, because, unlike fractional ownership, the elasticity of a CEO’s total wealth to firm performance is not spuriously related to firm size. With respect to the relation between incentives and subsequent firm performance, our results are consistent with the view that higher CEO’s incentives measured as price-performance elasticity, enhance firm accounting performance. Overall, future studies should consider price-performance elasticity as an alternative measure of executive incentives in addressing various research questions. Practitioner/Policy Implications: The evidence in this paper suggests that executive incentives calculated relative to their non-firm wealth are economically more meaningful if compared to the traditionally used measures. As such, compensation consultants and boards of directors can consider this alternative measure when designing executive compensation plans and determining an appropriate level of ownership, when the information on executive non-firm wealth is available.

Keywords: Corporate Governance, Incentives, Firm Performance

JEL Classification: M40

Suggested Citation

Rossi, Anna and Kallunki, Juha-Pekka and Nilsson, Henrik and Sahlström, Petri, CEO Personal Wealth, Equity Incentives and Firm Performance (July 30, 2012). Corporate Governance: An International Review, Forthcoming, Available at SSRN: https://ssrn.com/abstract=1342237 or http://dx.doi.org/10.2139/ssrn.1342237

Anna Rossi

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland

Juha-Pekka Kallunki (Contact Author)

University of Oulu - Department of Economics, Accounting and Finance ( email )

PO Box 4600
FIN-90014
Finland
+358 8 553 2956 (Phone)
+358 8 553 2906 (Fax)

HOME PAGE: http://www.cc.oulu.fi/~jpkallun

Henrik Nilsson

Umeå University ( email )

Umea School of Business & Economics
SE-901 87 Umea
Sweden

Petri Sahlström

University of Oulu ( email )

P.O. Box 4600
Oulu FIN-90014, 90570
Finland

Do you have negative results from your research you’d like to share?

Paper statistics

Downloads
330
Abstract Views
2,804
Rank
167,196
PlumX Metrics