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Article
Publication date: 20 March 2007

Gerald T. Garvey and Amin Mawani

The purpose of this study is to present theory and empirical evidence on whether changes in leverage are systematically associated with changes in the CEO's risk incentives over…

1984

Abstract

Purpose

The purpose of this study is to present theory and empirical evidence on whether changes in leverage are systematically associated with changes in the CEO's risk incentives over time.Design/methodology/approach – A model is developed to explain the dynamic relationship between leverage and managers’ risk incentives, and empirically tested with data on executive stock option grants. The model relies on the observation that the risk sensitivity of a call option does not monotonically increase or decrease in the value of the underlying stock.Findings – It is found that changes in the CEO's risk incentives are not systematically correlated with changes in the firm's leverage over time.Research limitations/implications – The near‐universal practice of setting option exercise prices near the prevailing stock price at the date of grant effectively undoes most of the effects of financial leverage, and therefore executives’ incentives to take equity risk are not correlated with firm leverage.Practical implications – For reasonable parameter values, this risk incentive‐maximizing stock price lies very close to the option's exercise price. This finding provides evidence that stock options plans granted approximately at‐the‐money encourage maximum risk‐taking by managers in a dynamic setting.Originality/value – This paper develops theory and evidence to explain why executive stock options are usually granted at‐the‐money.

Details

Managerial Finance, vol. 33 no. 4
Type: Research Article
ISSN: 0307-4358

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Article
Publication date: 4 July 2008

Nalinaksha Bhattacharyya, Amin Mawani and Cameron K.J. Morrill

This paper seeks to present and test a model of the association between dividend payout and executive compensation.

3445

Abstract

Purpose

This paper seeks to present and test a model of the association between dividend payout and executive compensation.

Design/methodology/approach

The authors develop a model based on Bhattacharyya whereby managerial quality is unobservable to shareholders, and therefore first‐best contracts are not possible. In the second‐best world, compensation contracts motivate high quality managers to retain and invest firm earnings, while low quality managers are motivated to distribute income to shareholders. These hypotheses arising from the model are tested on data for Canadian firms' dividend payouts over the period 1993‐1995 using tobit regression analyses.

Findings

Consistent with the predictions of the Bhattacharyya model, the results show that, ceteris paribus, earnings retention (dividend payout) is positively (negatively) associated with executive compensation. These results hold when payout is defined as common dividends plus common share repurchases.

Research limitations/implications

The Canadian data provide only limited information on the components of executive compensation. A more useful test would be possible with more detailed information on, for example, salary, bonus, and benefits.

Originality/value

Several recent papers have documented an association between dividends and executive compensation. This paper presents and tests a model that provides a potential explanation for this link.

Details

Managerial Finance, vol. 34 no. 8
Type: Research Article
ISSN: 0307-4358

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Available. Content available
Article
Publication date: 20 March 2007

216

Abstract

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Managerial Finance, vol. 33 no. 4
Type: Research Article
ISSN: 0307-4358

Available. Content available
Book part
Publication date: 20 October 2015

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Advances in Taxation
Type: Book
ISBN: 978-1-78560-277-1

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Book part
Publication date: 18 December 2016

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Advances in Taxation
Type: Book
ISBN: 978-1-78635-001-5

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Book part
Publication date: 22 October 2019

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Advances in Taxation
Type: Book
ISBN: 978-1-78973-293-1

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Book part
Publication date: 16 June 2023

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Abstract

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Advances in Taxation
Type: Book
ISBN: 978-1-83753-361-9

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Book part
Publication date: 20 June 2024

Free Access. Free Access

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Advances in Taxation
Type: Book
ISBN: 978-1-83549-585-8

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Book part
Publication date: 19 October 2020

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Advances in Taxation
Type: Book
ISBN: 978-1-83909-185-8

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Book part
Publication date: 18 September 2017

Abstract

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Advances in Taxation
Type: Book
ISBN: 978-1-78714-524-5

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