Peer-reviewed Publications

"Covid-19 Motivated Changes to Executive Compensation"

Mary Ellen Carter, Luann Lynch and Xiaoxia Peng, Journal of Management Accounting Research, forthcoming. 

We provide new insights into companies’ decisions to cut CEO pay during the COVID-19 pandemic by comparing 482 firms announcing CEO salary cuts to those that do not. We find that salary cuts are more prevalent in firms with poor pre-pandemic performance, lower cash holdings, employee layoffs, and better governance. Shareholders appear to view these cuts favorably in firms with higher CEO pay ratios and those that are the first among their peer firms to make such an announcement. These findings suggest that pay cuts reflect efforts to adjust pay efficiently in response to changes in contracting environments and to lend legitimacy to other difficult decisions firms face, alongside governance characteristics. We also find that CEO salary cuts coincide with well-timed equity grants that appreciate in value more than those in non-cutting firms and with a shift away from earnings-based metrics in performance-based incentive plans. 

"Ancestral Connections and Corporate Alliances"

Yihui Pan and Xiaoxia Peng, Journal of Corporate Finance 82, 2023. https://doi.org/10.1016/j.jcorpfin.2023.102450 

This paper studies how culture works as an implicit incentive alignment mechanism in corporate alliances. We measure the ancestral connection between different corporate headquarters places, using historical immigration from different countries to different areas of the U. S. When forming business alliances, the ancestral composition of the area where firms locate plays an important role in their choices of partners and the location of new ventures. Exploiting immigration to U.S. cities induced by WWI and the immigration acts of the 1920s, we find that ancestral connection driven by the supply-push component of historical immigrant inflows is associated with an increase in alliance intensity today. Finally, partnering firms experience significantly better performance when the ancestral connection between their headquarters or between their inventors is stronger. Shared values and beliefs between firms' key stakeholders likely underlie the role of ancestral connection.    

"Outside Opportunities, Managerial Risk Preferences, and CEO Compensation"

Wen Chen, Sumi Jung, Xiaoxia Peng, and Ivy Zhang, The Accounting Review, 97 (2), 135-160, 2022. https://doi.org/10.2308/TAR-2018-0614 

Exploiting the setting of staggered adoption of the Inevitable Disclosure Doctrine (hereafter IDD) in U.S. state courts, we examine how quasi-exogenous restrictions of outside employment opportunities affect CEOs’ risk preferences. IDD adoption constrains executives’ ability to work for competitors, resulting in a reduction in their employment options. We expect IDD adoption to increase CEOs’ risk avoidance by reducing the reward to risk taking in the form of better outside positions and increasing their costs of termination. Consistent with this prediction, we find that, when making investment decisions, CEOs are less responsive, post IDD adoption, to risk-inducing incentives provided by their compensation package. The effect is more pronounced for CEOs with more outside opportunities absent the IDD, whom the IDD’s restrictions are more likely to bind. We also find that the sensitivity of CEO wealth to stock return volatility (vega) increases significantly post IDD adoption and the increase is more evident for CEOs with more outside opportunities, consistent with the board adjusting compensation to overcome the reduction in risk appetite. Overall, we provide new evidence on how external labor market frictions affect CEO risk preferences and compensation. 

"The Participation Constraint and CEO Equity Grants"

Brian Cadman, Mary Ellen Carter, and Xiaoxia Peng, The Accounting Review 96 (1), 67-89, 2021

We examine the extent to which participation constraints influence CEO annual equity grants. Studying CEO equity grants over the period 2006-2016 and using equity grants to compensation peers as a proxy for the reservation equity grant level, we find that the reservation wage in equity is a determinant of the magnitude of equity grants. We also find that firms are more likely to meet the peer grant levels when there is higher labor market competition and when the firm discloses that key personnel is a risk factor. CEO turnover is more likely when the firm grants equity below the peer level. Further, firms are less likely to meet peer equity grant levels and increase cash compensation when the CEO holds a large portfolio of equity incentives. Overall, the results suggest that the participation constraint influences annual equity grants and that firms consider the potential costs of providing too much equity.

"Management Forecasts of Volatility" 

Atif Ellahie, and Xiaoxia Peng, Review of Accounting Studies 26 (2), 620–655, 2021

Forecasting stock return volatility is important but inherently difficult. We examine the predictive information content of management forecasts of volatility (i.e., expected volatility) disclosed in annual reports. We find that expected volatility predicts near-term and longer-term stock return and earnings volatility incremental to historical volatilities, firm characteristics, and alternative measures of uncertainty. We also find that expected volatility reflects private information about future investment activities, such as mergers and acquisitions and R&D intensity. Finally, we find that expected volatility is positively associated with volatility straddle returns consistent with option prices not fully incorporating the information in expected volatility. Overall, we provide novel evidence that management forecasts of volatility contain private information about future uncertainty that can be useful for forecasting volatility. 

"Inducement Grants, Hiring Announcements and Adverse Selection for New CEOs"

Brian Cadman, Richard Carrizosa, and Xiaoxia Peng, Review of Accounting Studies 25 (1), 279-312, 2020

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 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. We also find a positive relation between the market reaction to the appointment and $Sensitivity. Overall, we document that information asymmetry influences the sensitivity of new CEO inducement grants to the announcement return.

"Compensation Disclosures and Corporate Governance through Shareholder Voting"

Brian Cadman, Richard Carrizosa, and Xiaoxia Peng, Journal of Management Accounting Research 32 (3), 27-48, 2020

We examine whether shareholders consider additional disclosures of equity compensation measures beyond the grant date fair value when participating in corporate governance. We find that CEO equity compensation expense, a distinct measure of equity compensation, is a determinant of shareholder voting for management sponsored equity plans and voting for directors that serve on the compensation committee.  We also find evidence that shareholders consider equity compensation expense in addition to the Institutional Shareholder Services (ISS) recommendation when voting, and that ISS focuses on the grant date fair value when determining their recommendation. Consistent with the equity compensation expense providing distinct information, we document that firms shorten equity compensation vesting periods when they are no longer required to disclose the equity compensation expense. Our findings suggest that multiple distinct measures of equity compensation are useful to shareholders participating in corporate governance.

Other publications

"COVID-RELATED PAY CUTS FOR CEOS"

Mary Ellen Carter, Luann Lynch, and Xiaoxia Peng, Strategic Finance 103 (11), 34-41, 2022

The COVID-19 global pandemic created significant financial and operational challenges for executive teams. Faced with financial pressures, companies responded with employee pay cuts, furloughs, and layoffs. CEOs soon learned that they, too, were in the corporate crosshairs, especially when it came to compensation. Companies had to balance the risks of reducing financial incentives at a time when even more was being asked of CEOs against the potential backlash from shareholders and other stakeholders of maintaining high pay packages in the face of economic uncertainty. We examined companies that announced pay cuts for their CEO during the COVID-19 pandemic and the reasons behind these moves, including companies’ financial position and governance structure. Organizations announcing pay cuts, we soon learned, generally had lower cash reserves and poorer performance leading up to the pandemic. It therefore makes sense that the uncertainty created by COVID-19 would weigh heavily on these companies and lead to efforts, like pay cuts, to conserve cash. We also found that companies with high CEO pay ratios—the ratio of CEO total compensation to the pay of the median worker—were more likely to announce pay cuts.

Selected working papers

"Compensation Disclosure: A Study via Semantic Similarity"

Maclean Gaulin and Xiaoxia Peng

This paper studies how economic factors influence executive compensation disclosures. We employ a novel measure based on a natural language processing algorithm, document embeddings, to capture nuanced semantic aspects of compensation disclosure. Consistent with our predictions, we find that firm size, industry similarity, disclosed compensation peers, and common compensation consultants are all associated with more similar compensation disclosures. This semantics-based measure could be widely applicable to the literature on narrative disclosures as it addresses some of the shortcomings of traditional textual measures. Specifically, it could facilitate more research into cross-firm comparisons and disclosure clustering, among other subjects. 

"Shareholder lawsuits and CEO turnover decisions"

Rachel Hayes, Xiaoxia Peng and Xue Wang

We study the effect of shareholder litigation rights on CEO turnover policies using U.S. states’ staggered adoption of Universal Demand laws, which restrict shareholder lawsuits that allege a breach of fiduciary duty by directors or managers. We document that reduced shareholder litigation rights are associated with greater CEO turnover-performance sensitivity, and that this effect is more prominent in firms with existing blockholders and higher ex-ante litigation risk. The empirical evidence suggests a substitute relationship between active monitoring through CEO turnover policies and disciplinary shareholder litigation. Our study contributes to the debate on the role of shareholder litigation in corporate governance. 

"Mergers and acquisitions and CEO debt-like compensation"

Xiaoxia Peng

Prior research examining the effect of CEO compensation schemes on M&A decisions largely focuses on equity compensation. However, a significant portion of CEO compensation is debt-like (e.g., deferred compensation and defined benefit pensions), i.e. inside debt. Theory suggests that inside debt compensation aligns CEOs’ incentives with those of debtholders. I examine whether CEOs with higher inside debt compensation relative to equity compensation are more aligned with debtholders than equity-holders when making M&A decisions. Supporting the incentive alignment argument, I find that acquirers with higher CEO relative inside debt compensation pick less risky targets and are more likely to pay cash, which is consistent with their CEOs being less risk-seeking and therefore having lower cost of debt. The announcement stock returns are lower for acquirers with higher CEO relative inside debt compensation. I also find a lower association between bond returns and stock returns to M&A announcements for acquirers with high level of CEO relative inside debt compensation than for those with medium level. In addition, I document that post-merger stock return volatility changes and goodwill impairments are lower for acquirers with higher CEO inside debt. Overall, my study suggests that, when examining effects of CEO incentives on their decision-making, it is important to consider the relative incentive alignment between CEOs and both groups of stakeholders. 

“Debt-Equity Conflict, Accounting Conservatism, and Executive Compensation ”

Zhaoyang Gu and Xiaoxia Peng

Equityholders have the incentive to take excessive risk at the expense of debtholders, due to their differential preferences for risks. We argue that executive compensation combined with accounting conservatism can help mitigate this debt-equity conflict. For a risky investment, e.g. R&D, conservative accounting expenses all costs immediately, reducing the accounting earnings, while the stock price may react positively when the investment has positive NPV. By tying executive compensation more to accounting earnings than to stock returns, managers would be “punished” for taking risky projects due to lower compensation in the early years, and thus incentivized to take less risk, which benefits debtholders. We find that the CEO pay sensitivity to accounting return on asset (ROA) increases with financial leverage, a proxy for debt-equity conflict. Such higher sensitivity is primarily driven by the bonus portion of CEO compensation. In addition, the results are concentrated among firms with higher accounting conservatism and higher operating uncertainty, consistent with the notion that protection of debtholders is most needed when uncertainty is high and most effective when accounting is conservative.