Executive compensation and the corporate spin-off decision

Yi Feng, Debarshi Nandy and Yisong S. Tian

Journal of Economics and Business, 2015, vol. 77, issue C, 94-117

Abstract: We investigate the effect of CEO equity incentives on corporate spin-off decisions and find that CEOs with stronger equity incentives are, ceteris paribus, more likely to engage in corporate spin-offs (after correcting for potential endogeneity concerns). In addition to confirming previous findings that spin-offs are followed by positive announcement and long-run abnormal stock returns, we show that the level of the CEO's incentives matters. In particular, we find that while low incentive firms have a stronger announcement effect, high incentive firms experience better long run stock performance following spin-offs. This is consistent with the disciplining effect of spin-offs since low incentive firms are also found to have more independent boards. While a stronger board may be more influential on key corporate decisions (e.g., spin-offs), better incentive alignment leads to superior long run performance. Our results thus suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary in the long run.

Keywords: Executive compensation; Spin-off; Managerial equity incentives; Board independence; Corporate restructuring; Long-term performance (search for similar items in EconPapers)
JEL-codes: G34 M52 (search for similar items in EconPapers)
Date: 2015
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jebusi:v:77:y:2015:i:c:p:94-117

DOI: 10.1016/j.jeconbus.2014.09.003

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