Essays on Managerial Compensation
Doctoral Candidate Name: Gunratan Lonare
Program: Business Administration: Finance
Defense Date and Time: March 31, 2022 – 2:00 PM
Defense Location: Online via Zoom
Committee chair’s Name: Dr. David Mauer
Committee Members: Dr. Gene Lai, Dr. Yilei Zhang, Dr. Artie Zillante
Abstract:
My dissertation consists of three essays that are related to executive compensation.
The first essay examines whether CEOs’ personal capital gains tax liabilities stemming from their compensation affect their firms’ financial reporting policy. Recent studies show that the tax-induced lock-in effect discourages CEOs’ to unwind their unrestricted equity and subsequently exacerbates their risk-aversion. I investigate how CEOs’ unrealized capital gains tax liabilities (tax burdens) influence financial reporting conservatism. I find that the demand for accounting conservatism decreases with CEO tax burdens. Further analyses show that the negative relation between CEO tax burden and conservatism is stronger when the firm has high leverage, high default risk, and when the CEO’s incentives are more aligned with equityholders. This highlights the shareholder-creditor agency conflicts mitigation role of CEO tax burdens in reducing creditors’ demand for conservatism. I exploit the Federal Taxpayer Reform Act of 1997 and staggered state-level tax cuts that significantly decreased personal capital gains tax rates as identification strategies. I find a significant increase in conservative reporting following the federal and state tax cuts in firms with higher CEO tax burdens before these tax cuts.
In my second essay, we examine how the tournament-like progression in the CEO labor market influences corporate innovation strategies. By exploiting a text-based proxy for product innovation based on product descriptions from 10-Ks, we find a positive and significant relation between industry tournament incentives (ITIs) and product innovation. We then explore the trade-off effects of ITIs on product innovation created through long-term patenting technologies and short-term product development. We discover that ITIs strengthen short-term innovation but decrease patent-based innovation. Further analyses show that the effect of ITIs on product innovation is stronger when the product market is more competitive and when CEO characteristics indicate a higher probability of winning the tournament prize.
My third essay examines how a tournament among CEOs to progress within the CEO labor market influences their corporate hedging policies. We employ a textual analysis of 10-Ks to generate corporate hedging proxies, finding that the likelihood and intensity of hedging grow as the CEO labor market tournament prizes increase. We also explore the mitigating impact of corporate hedging on the adverse effects of risk-inducing industry tournament incentives (ITIs) on the cost of debt and stock price crash risk, noting that these could be possible reasons behind the relation. Additionally, we observe that the relationship between ITIs and corporate hedging is less pronounced for firms that demonstrate more financial distress and for firms whose CEOs are the founders of the company or are of retirement age. We identify a causal relation between ITIs and corporate hedging using an instrumental variable approach and an exogenous shock sourced from changes in the enforceability of noncompetition agreements across states.