Publications

"The Participation Constraint and CEO Equity Grants"

Brian Cadman, Mary Ellen Carter, Xiaoxia Peng, the Accounting Review, forthcoming.

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.

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

Brian Cadman, Richard Carrizosa, 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.

"Management Forecasts of Volatility"

Atif Ellahie, Xiaoxia Peng, Review of Accounting Studies, forthcoming

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.

"Compensation Disclosures and Corporate Governance through Shareholder Voting"

Brian Cadman, Richard Carrizosa, Xiaoxia Peng, Journal of Management Accounting Research, forthcoming.

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.

Selected working papers

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

Wen Chen, Sumi Jung, Xiaoxia Peng, Ivy Zhang

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 affects CEO risk preferences and compensation.

"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 equityholders 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, Xiaoxia Peng

We examine how capital structure affects the sensitivity of CEO annual pay to the accounting performance measure. We find that the CEO annual pay sensitivity to accounting performance measure increases with financial leverage. Given the conservative nature of the accounting performance measure, this result is consistent with an optimal compensation contract trying to mitigate the moral hazard problems both between shareholders and the manager and between shareholders and debtholders simultaneously. As the conflict of interests between shareholders and debtholders increases, firms put more weight on conservative accounting performance measures when rewarding CEOs to reduce agency cost of debt. The result is driven by firms with high accounting conservatism and uncertainty in operation. We also find this effect is mainly driven by the increased sensitivity of the bonus awards.