Showing papers by "David Yermack published in 1995"

Managerial Entrenchment and Capital Structure Decisions

Abstract: We test the prediction that leverage is inversely associated with managerial entrenchment. We examine leverage levels and year-to-year changes for several hundred firms between 1984 and 1991. We find that leverage levels are positively related to CEO stock ownership and CEO stock option holdings, and negatively related to CEO tenure and board of directors size. While generally consistent with less entrenched CEOs pursuing more leverage, these results are subject to alternative interpretations. We therefore analyze year-to-year changes in leverage around exogenous shocks to corporate governance variables. We find that leverage increases after unsuccessful tender offers and â¬Sforcedâ¬? CEO replacements, and under certain conditions after the arrival of major stockholders. These relations have greater magnitude when the sample is restricted to low-leverage firms, even when 80% of firms are defined as low-leverage. The results are consistent with decreases in entrenchment leading to increases in leverage, and with the majority of firms having less debt than optimal.

Good Timing: CEO Stock Option Awards and Company News Announcements

Abstract: This paper proposes and implements a new method for investigating whether CEOs influence the terms of their own compensation. I analyze the dates of 591 stock option awards to CEOs of Fortune 500 companies in 1992 and 1993, finding that the timing of awards coincides with favorable movements in companies stock prices even though the awards remain secret for many months. Patterns of corporate earnings and dividend announcements suggest strongly that CEOs receive stock option awards shortly before favorable corporate news and that awards are delayed until after the release of adverse news. Analysis of abnormal volume data does not support the possibility that insider trading based on knowledge of the option awards can explain the stock price gains. The findings imply that top mangers can affect their companies processes for awarding stock options and exploit this influence in order to increase compensation.

Investment Opportunities and the Design of Debt Securities

Abstract: We investigate whether convertibility provisions and restrictive covenants operate as substitute methods for reducing agency costs of debt. In a study of the 192 recent debt issues, we find that an issuer s investment opportunities are negatively related to the presence of covenants and positively associated with the incidence of convertibility after controlling for investment opportunities. The results support an interpretation that covenants impose costs by limiting mangers choices, leading firms that value managerial flexibility to prefer convertibility provisions as a method of reducing the agency costs of debt.

Companies' Modest Claims About the Value of CEO Stock Option Awards

Abstract: This paper analyzes company disclosures of CEO stock option values in compliance with the SEC s regulations for reporting executive compensation data to stockholders. Companies appear to exploit the flexibility of the regulations to reduce the apparent value of managerial compensation. Companies shorten the expected lives of stock options and unilaterally apply discounts to the Black-Scholes formula. Theoretical support for these adjustments is often thin, and companies universally ignore reasons that the Black-Scholes formula might underestimate the value of executive stock options. The findings not only cast light upon how corporations value executive stock options, but also provide a means of forecasting compliance with controversial new FASB requirements for firms to disclose the compensation expense represented by executive stock options.

Companies' Modest Claims About the Value of CEO Stock Option Awards

Abstract: This paper analyzes company disclosures of CEO stock option values in compliance with the SEC's regulations for reporting executive compensation data to stockholders. Companies appear to exploit the flexibility of the regulations to reduce the apparent value of managerial compensation. Companies shorten the expected lives of stock options and unilaterally apply discounts to the Black-Scholes formula. Theoretical support for these adjustments is often thin, and companies universally ignore reasons that the Black-Scholes formula might underestimate the value of executive stock options. The findings not only cast light upon how corporations value executive stock options, but also provide a means of forecasting compliance with controversial new FASB requirements for firms to disclose the compensation expense represented by executive stock options.