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Tomislav LadikaPh.D. Candidate Department of Economics, Brown University Research FieldsCorporate Governance, Corporate Finance, Applied Microeconomics |
Job Market Paper
Do Firms Replenish Executives' Incentives After Equity Sales?
Boards grant executives equity to align their incentives with those of shareholders. Yet executive equity sales are common --- 60 percent of executives sell firm equity during their tenure --- and can cause an executive's holdings in the firm to become suboptimally low. I empirically examine whether boards restore a selling executive's incentives by shifting the composition of his subsequent pay toward more equity. Firm-level changes can cause executives to sell equity and simultaneously reduce their need for incentives. I account for such variables by comparing executives who sell equity to other top executives at the same firm who do not sell. I find that boards grant similar pay to selling and non-selling executives at the same firm, and replenish at most 10 percent of incentives lost due to a sale. My results suggest that boards do not maintain executives' incentives at an optimal level, as predicted by efficient contracting theory.
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