The relationship between CEO payment structures and
short-term temporal orientation in the US market
approached from a behavioral and organizational perspective
Name: Robin Carmiggelt
MSc Business Administration – International Management University of Amsterdam
Thesis supervisor: Robert Kleinknecht Date: 26/07/2016
1 This document is written by Student Robin Carmiggelt who declares to take full responsibility for the contents of this document. I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it. The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Preface
I want to thank the people that supported me during writing my thesis. First of all, I want to thank my supervisor for providing me with support, new insights during the research, feedback and maybe most of all, with the provision of the data on temporal orientation, which is an essential element of this study that I could not have generated on my own. Next to my supervisor I want to thank my parents and my girlfriend for the support during writing my thesis and my master in general.
2 Abstract
This study focuses on the temporal orientation of the CEO, with an emphasis on the short term orientation. The temporal orientation of a CEO refers to his or her preference for a specific time horizon, which can be either short or long term related. This preferred horizon is measured via content analyses of transcripts, which are provided by the supervisor of this study. An investigation will be conducted whether certain CEO characteristics influence this temporal orientation of the CEO. Starting with the amount of short term compensation the CEO receives the amount of short term options he or she holds and the CEO’s age and length of tenure. These independent variables are complemented with the introduction of the company’s takeover defenses, that are assumed to have a negative influence on the relationship between the independent variables (short term compensation, short term options and age & tenure) and the dependent variable, the short term temporal orientation. I found evidence that short term compensation indeed is a predictor for short term temporal orientation, but not for the options the CEO holds nor for his age and tenure. This research covers 1765 firms that are listed on the NYSE or NASDAQ between the years 2007 and 2014. As this study has a longitudinal character, a panel data regression will be undertaken to investigate the underlying assumptions.
Keywords: Temporal Orientation, CEO Compensation, CEO Age & Tenure, Takeover Defenses, Stock
3 TABLE OF CONTENTS 1. INTRODUCTION ... 4 2. LITERATURE REVIEW ... 6 2.1 Temporal orientation ... 6 2.2 Executive Compensation ... 8
2.3 CEO Tenure & Age ... 12
2.4 Anti Takeover Mechanisms ... 16
3. METHODLOGY ... 18
3.1 Data Sources & Timeframe ... 18
3.2 Operationalizing of the Variables ... 19
Independent variable ... 19
Dependent Variables ... 21
Moderating variable ... 22
Control Variables ... 23
3.3 Statistical Analyses and Results ... 23
4. DISCUSSION ... 31
5. CONCLUSION ... 33
6. LIMITATIONS ... 34
7. FUTURE RESEARCH ... 35
4
1. INTRODUCTION
‘Short-sighted temporal orientation leads to negative firm performance over the long run’ is the prevailing view of academics and experts (Reilly et al. 2016). As clear and obvious this definition or phenomenon may seem, there is a broad base of literature discussing the exact meaning and characteristics of temporal orentation (Aspara et al. 2014; Bushman et al. 1996; Dechow & Sloan, 1991). Short-sighted temporal orientation can be defined as the preference for the improvement of short-term earnings over long-short-term earnings, and thereby sacrificing the benefits that can be obtained by investing in long-term projects, as the latter may result in a higher overall return on investments (Aspara et al. 2014). Many crucial decisions in firms are subjected to this dilemma that is caused by the chosen path of action towards long-term investments in a given company, as this may be a suboptimal path when short-term results are considered (Martin et al. 2015; Laverty, 1996). As the general prevalence may be that long-term firm performance is preferred, there are also shareholders that rather prefer short-term company results (Bolton et al. 2006). But this view will not be dealt with in this research.
In order to grasp the cause of this short-sighted temporal orientation in companies, the chief executive officer (CEO) is often mentioned as the designated driver to steer the strategic direction of the firm (Westphal & Fredrickson, 2001). The firms that are included in this research are listed on either the NYSE or the NASDAQ, which together represent the number one and two exchanges worldwide in terms of total market valuation. These firms are all characterized by a separation of ownership (i.e. shareholders) and leadership (i.e. CEO) described in the agent-principal relationship (Bebchuck & Fried, 2003). This separation of ownership and leadership is the basis for the existence of tensions in preferences of the firm’s strategic direction, derived from shareholders on the one hand, and the CEO on the other hand. In order to reconcile these different views on the firm’s strategic management, the CEOs receive a remuneration package (Eisenhardt, 1989). The CEOs compensation can be divided into short and long term compensation. The short term component included the bonuses and base salary, and the long term component includes stocks, pensions, restricted stocks and other long term incentives (Reilly et al. 2016). Short term compensation does not provide the CEO with long term incentives, but rather acts as a short term incentive to boost the CEO’s personal wealth (Wang et al. 2015). Therefore, CEO are seen as opportunistic, and increasing amounts short-term compensation received by the CEO, will lead to an increased orientation of the executive to the short term.
Also, stock options can work as either long or short term incentives, depending on whether the CEO can sell them immediately or in the future. Exercisable stocks, those that are ready to be traded, can act as a short-term incentive for the CEO (Bolton et al. 2006). When a CEO possesses more exercisable options in relation to his or her total options held, there will be an increase in the short term temporal orientation of the executive (Souder & Shaver, 2010).
5 On the other hand, stock options that are not immediately ready to be exercised, but further away in time, can work as an incentive for the CEO to alter his personal orientation to the short term (Martin et al. 2015). Therefore, the expectation is that CEOs that hold larger amounts of exercisable options over unexercisable options will prefer a short-term temporal orientation. In addition to the effects of short term compensation and short term options, the CEO’s age and tenure are also expected to influence his temporal orientation. It is expected that the CEOs with higher ages and longer tenures will be more concerned with short term, as the CEO will quit the company in the near future, which has serveal consequences that will be discussed in more detail. In essence, higher ages and longer tenures are expected to increase a shift short-term temporal orientation of the executives over long term orientation (Antia et al. 2010).
The CEOs included in this study are managing large sized publicly traded firms. Being the CEO of a publicly traded firm, imposes another concern for CEOs, namely the threat of hostile takeovers. But firms are able to implement anti-takeover provision to prohibit this threat. The anti-takeover mechanisms (ATMs) are a widely discussed topic in literature (Mahoney et al. 2007). As the literature did not reach consensus yet, there is a great deal of evidence that companies benefit from takeover provisions, both in terms of innovative development and by means of a long-term vision (Sundaramurth, 2000). When the ATMs are viewed from the perspective of the CEO, one should expect that the anti-takeover provisions have a mitigating effect on the short term temporal orientation of the CEO as he or she is relieved from pressures by the market for corporate control. This is addressed by the shareholder interest theory which arguments that due to the implementation of takeover provisions, a CEO has less exposure to unemployment risks and the CEOs are relieved from short-term market pressures stemming from the market for corporate control (Sundaramurthy, 2000; Kacperczyk, 2009; Wanasika & Limbu,
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6 2015). In accordance with the stockholder interest theory, the implementation of ATMs stimulates the long-term orientation by the CEO.
2. LITERATURE REVIEW
The model above describes the relationships that will be central to the discussion and research in this paper. In this section, the model will be explained in detail as well as the underlying assumptions and theory that form the basis of the model. First of all, there will be a description of temporal orientation. What does it constitute? Second, the attention will shift to the relation between the CEO’s compensation schemes, the stock options and the age and tenure in relation to temporal orientation. As different pay structures impose different incentives for a CEO, he or she will behave differently according to these different pay structures. Behavior of the CEO can be altered by implementing anti takeover provisions within the firm. The last part of the theoretical research will investigate the effect of these anti-takeover measures upon the relationship between the CEO pay structures and short-termism on the firm-level.
2.1 Temporal orientation
There has been an ongoing debate around the topic of temporal orientation for over a few decades, but attention has increased over the last years when the world economy was hit by the global financial crisis that started in 2007. Due to this financial crisis and the media attention that went along with the crisis, short-termism became a more central topic of debate.
As written earlier, short term temporal orientation can be summarized as the preference for the improvement of short-term earnings over long-time earnings, that could possibly deliver more value to the organization when exercised (Aspara et al. 2014; Dechow & Sloan, 1991). In order for firms to prosper, they have to find a balance between their short and long-term investments. The balance between the long and short term should contribute to the optimal firm performance (Martin et al. 2015). Laverty described this trade-off in his paper as a problem of intertemporal choice that is central to his research. This problem can be summarized as ‘the course of action that is best in the short term is not the same course of action that is best over the long run’ (1996, p.828). The problem is visualized in this figure whereby line A stands for short-term investments and line B for the long-term investments:
7 This figure displays two possible investments that can be chosen from by a firm, that is mutually exclusive in nature. This mutuality is the reality for firms as they do not have an infinite amount of resources. This scarcity results in forcing them to make trade-offs in the allocations of those recourses. In the figure, investment ‘A’ does not need a large up-front investment and it has an incremental raise in return over the short-term bus does not result in long-term returns for the organization. The other option (that is labeled B) does need much more up-front investments and therefore has a negative return in the first period but it does result in higher returns over the long-run. In an ideal situation, managers pursue the situation that maximizes the overall benefits of the firm over the long run. The trade-off between the two options and the potential problems it causes are described in the paper of Marginson & McAulay (2008) as the intertemporal trade-off that results in a suboptimal decision made by the managers in the firm. Wiley imposes that solely focusing on the long term by firms does not result in optimal results either, as short-term results have to be achieved as well, in order for the firm to survive (Wiley, 2008). This trade-off shifts the attention to the need for balancing between short and long term temporal orientation.
In research undertaken by Souder & Bromiley (2012), an attempt is undertaken to reconcile insights from the behavioral theory of the firm with theory covering managerial incentives. The first theory is introduced in: ‘A behavioral theory of the firm’, written by Cyert & March (1963). They were the first ones to investigate firm behavior concerning among other things their resource allocation, pricing output, and the organizational decision-making process. Souder & Bromiley (2012) conducted a study that further investigated the resource allocation and its relationship to short term orientation. They defined short termism as allocating resources to short term investments over long term investments. Souder & Bromiley tried to link this behavior and resource allocation processes with the managerial incentives. In their research, they found evidence that the managerial incentives indeed effect the behavior of the firm through temporal orientation. The temporal orientation is defined as ‘the relative importance given to strategic choices to investments with differing distributions of costs and benefits over time’ (2012: p.551). This implicates that managerial incentives indeed effect firm behavior, which is the basis of this research.
That temporal orientation among executives is an important determinant in the firm’s strategic decisions, is also acknowledged by Nadkarni, Chen, and Chen. By the introduction of the temporal depth, which measures the distance in the future or past on which CEOs are dependent when evaluating events that could happen or already happened. They argue that CEOs that adapt short time horizons are more flexible in adjusting to current changes in the firm’s environment but do have the risk of becoming myopic and causing economic short termism (2016).
8 Recent research undertaken by Reilly, Souder & Ranucci (2016) demonstrates a literature review in which time horizons are approached from different angles, including short termism. They describe how tensions exist between the different approaches of time horizons stemming mainly from the risk and uncertainty associated with the timing of the resource allocations. They describe short termism as part of the time horizon but they do not discuss does not address the follow-up approaches in detail.
One approach of time horizons stems from personal preferences for allocating resources to investments with primarily immediate or deferred payoffs (2016). These preferences can differ between individuals and thus between different CEOs and are concerned with the frame of mind of the individual. They relate to the favor for more immediate payoffs that result in less attention for long term firm performance. In line with the proposed model in this paper, we expect that this preference for short-termism is reinforced by compensating CEOs for a large extent with variable over fixed wages. Also, CEOs that possess more exercisable shares over unexercisable shares will reinforce the personal preference of short-termism is the prediction in this study.
Another approach stems from a more accountancy based approach that focuses on the investment horizon. The authors explain in their paper that firms tend to excessively increase discount rates as investments have longer payoff periods, resulting in low payoff expectations due to high discount rates (2016). Discounting schemes correlate to personal preferences for different time horizons as these preferences are reinforced by using high discount rates on future earnings of different expenses. Negative implications on the firm’s performance in the long-run are described by Brauer who argues that if annual earnings and other short term results are leading the company’s strategy, the attention is deviated from long-term investments in R&D and innovative business practices (2013).
2.2 Executive Compensation
The total remuneration to CEOs, and employees in general can be divided into several items, for example a fixed basic salary, variable remuneration, stock options, pensions and other benefits. The compensation can also be divided according to their temporal classification, which can be either short or long term. ‘Short term compensation typically includes salary, annual bonuses, and other short term incentives. Long term compensation, which links the rewards of executives to long term organizational performance, usually includes stock options, restricted stock grants, and other long-term incentives’ (Wang et al. 2015: p. 4).
The owners of the company, which in this research are the shareholders, make investments in a company that is not managed by themselves but by a CEO who is their agents and acts on behalf of the owners and has general control over the company. The agency theory describes the tensions that surround resource allocation decision by CEOs. These tensions evolve because the personal preferences and interests of the CEO may deviate from the preferences of the owners of the company with regard to this
9 allocation (Bebchuck & Fried, 2003; Reilly et al. 2016; Martin et al. 2015). CEOs are, in contrast to the shareholders, more risk-averse as they are not able to diversify the risks associated with their job. Shareholders, on the other hand, have more options to diversify the risks of their investments over multiple investment opportunities. Therefore, in principle CEOs are expected to act on the basis of self-interests and are aiming for self-enrichment or empire building. ‘Scholars and industry experts share a prevailing belief that short time horizons have negative performance consequences, at least in the long term. With that said, managers regularly make short-term focused choices, no doubt as a result of the immediate benefits available’ (Reilly, Souder & Ranucci, 2016: p.1185). According to Eisenhardt the performance of the CEO is hard to be measured as there are more variables that influence the company’s performance and the CEO has more inside information on the company (i.e. information asymmetry). As a remedy for this behavior, the owners implement control mechanisms which are expressed by means of the remuneration package to the CEO (1989).
Fixed Salary. The base or ‘fixed’ salary of the CEO is generally fixed and determined upfront for the
upcoming fiscal year(s) by the compensation committee. The compensation is dependent a wide variety of job-related and person-related characteristics, hence the big differences in CEO compensation in similar firms. Amongst these characteristics are challenges and tasks of the CEO, seniority, experience and comparable peer salaries. The proportion of the base salary in the total compensation can range from zero to the full amount but often lies in the range between 10% and 30% of the total compensation (Geiller et al. 2009; Goploan et al. 2014).
Bonuses. Together with the base salary the bonuses (i.e. cash bonuses) are mostly remunerated on a
yearly basis. The latter is depending on thresholds that must be met by the CEO in order to receive the bonus. The dependency on targets makes the bonus to be part of the variable compensation package. Therefore, they are predominantly dependent on past performance or future performance thresholds. The thresholds for receiving the bonuses are related to the company’s profit or income measures, but can also be related to sales, market capitalization (e.g. share price), or include bonuses related to the guidance of a successful merger of or acquisition by the CEO (Towers & Watson, 2015).
As the annual bonuses are often dependent on firm performance, this mechanism could act as short-term incentives for the CEO. The CEO is motivated to attain these thresholds in order to gain personal wealth or improve personal reputation. The aiming for short-term results could disturb the long-term incentives and the related long-term performance of the organization (Brauer, 2014; Geiller et al. 2009). This could only hold if the short-term focus by the CEO does not ‘back-fire’ during the CEO’s own tenure. Besides the immediate personal wealth, the personal reputation of the CEO and job-security are
10 at stake as well. Both are thriving on short-term results which could imply that CEOs will benefit from the short-term focus as long as his strategy does not affect his long-term wealth creation (Brauer, 2014).
The fixed salary and the annual bonuses are part of the short-term compensation of the of the CEO. This compensation does not facilitate incentives for the CEO to allocate more company or personal resources to the long term performance of the firm, but rather shifts attention to short-term results (Finkelstein & Boyd, 1998; Geiler et al. 2011, Wang et al. 2015; Gopolan et al. 2014).
H1: Higher ratios of short term compensation in relation to the total compensation, will increase the short temporal orientation of the executive.
Long-term Compensation Plans. Besides the base salary and bonuses, there is also a wide variety of
possibilities for long term compensation. Those are designed in order to create a sustainable compensation plan for the CEO to align his with the those of the stakeholders of the organization. These interests are presumed to be in favor of term growth strategies that are led by the CEO. The long-term incentives can be divided into stocks, stock-options and other long-long-term incentive plans. In general, these incentives are designed to act as a long term incentive for the CEO as his personal interests are aligned with the long term performance of the firms (Gopolan et al. 2014; Geiller et al. 2009; Wang et al. 2015).
CEO compensation went through a period of change during the last two decades. Compensation of CEOs in the Fortune500 have risen dramatically during this period. As the average total compensation in 1989 was ‘only’ 2.5 (M$), the average in 2012 has amounted to 10.5 (M$). The underlying basis of this growth in CEO compensation is an acceleration of stock-options as part of the total remuneration of CEOs over the period 1990 to 2009 (with the exception of the years 2003 and 2004) followed by a powerful deviation away from stock-options during the period after 2009. The total percentage of base salary including bonuses has doubled over this period, but the total amount od stocks-compensation has quadrupled in the same period.
A stock-option provides the CEO with the possibility to exchange this option for stocks that can be exchanged in the market place. The term for these options can range from three to ten years and is dependent on the terms that are drawn by the remuneration committee and the board of directors in cooperation with the CEO. This committee consists of mostly of independent advisors who are able to objectively advise on the level of compensation (Wang et al. 2015).
11 In order to align the interests of the shareholders with those of the CEOs in the most efficient way, stock options are considered to be efficient means of remuneration as ‘stock prices are unbiased estimators of firm fundamentals on which CEO pay could be based to reward managerial effort’ (Bolton et al. 2005: p.577).
Stock options are, in this case, an agreement between the CEO -the grantee- and the company – the grantor. This stock compensation usually has some restrictions regarding the vesting period and price. The vesting period of an equity option defines the period that the CEO must wait until its option will become exercisable. So the value of the options is captured when the stocks are exercised in accordance with the agreed price and vesting period (Wu & Tu, 2007). In particular, as these vesting periods have an impact on the moment access is gained to this part of the compensation, this can have important consequences for the temporal orientation of CEOs and alignment with the long term company performance (Geiller et al. 2009; Wu & Tu, 2007; Jensen and Murphy, 2010).
In relation to the vesting period, a stock option can be either classified as exercisable or unexercisable. Exercisable stock options refer to options that are at the end of their vesting period or options that are to be utilized at the moment of distribution (Bens et al. 2003). Unexercisable options incentives the CEO for long term company performance as these options are not yet to redeemed. This is in contrast to exercisable options but these options do work as an incentive for short term company growth as these options are readily exercisable and do not act as a stimulus to grow over the long-term (Martin et al. 2015).
Bolton, Scheinkman & Xiong argue that although stock options are able to expand the horizon of the CEO, and move the attention to long term performance of the firm, there also exist the possibility that stock-options which are exercisable in the near future stimulate short term behavior. As the authors are not aware of any evidence-based effect of (nearly) exercisable stocks, the research conducted in this paper may contribute to this research gap. When a CEO possesses more exercisable stocks compared to unexercisable stocks the prediction his that his preference will shift to a short term temporal orientation in order to increase personal wealth as the managers are expected to behave opportunistically (2005).
Cash and other directly exercisable forms of compensation give no impulses to expand the time-horizon of the CEO as short-term investments are directly translated into compensations within that period (Bushman et al. 1995; Bizjak et al. 1993). But in the case of stock-options with a more extended vesting period, the CEO has more incentives to expand the time-horizon of the company’s investments to capture the full value of its future stock options. Souder & Shaver summarize this by stating: ‘We argue that when managers hold high levels of exercisable stock options, their firms are less likely to make
12 long-term investments. However, firms are more likely to pursue long horizon investments when managerial stock options are not yet exercisable’ (2010, p.1316).
H2: When CEOs hold more exercisable stocks in relation to the exercisable and unexercisable stocks in the company, the short term temporal orientation of the executive will increase.
One side note is the diluting effect of CEOs that already exhibit a large portion of the company’s shares. This allows the effects for the stock compensations to be offset by the fact that a CEO already owns a large number of shares and therefore the new shares will not imply the stimulating effects as described above (Fahlenbrach & Stulz, 2010). But overall, stock options will increase a CEO’s wealth and preferences for taking risks. As the stock gains of CEOs grow, the sensitivity for volatility will increase accordingly. This results in a better alignment of the CEO’s interests with those of the shareholders and may even effect the preferences for investments with a longer time horizon (Fahlenbrach & Stulz, 2010).
2.3 CEO Tenure & Age
When a CEO approaches the age of retirement, the tensions and costs related to the short term temporal orientation will show a significant increase. The agency problem is briefly summarized by the misalignment between the incentives of owners and the principals within the firm (Bebchuck & Fried, 2003; Davidson et al. 2007; Antia et al. 2010). A higher age of the CEO coincides with more emphasis on short time temporal orientation that will effect the investments made by those CEOs (Dikolli et al. 2013). CEOs emphasize short-term earning management in order to boost pension benefits and avoid losses ((Kyalata, 2009). Following this higher age and longer tenure, several consequences are unfolded, which will be addressed in this chapter.
CEO Age Risk-aversion
CEOs that become older will demonstrate less risk-taking behavior in project planning. This mitigation implies a preference for stable, less volatile and more certain investments in the short term over investments who may be beneficial in the long-run but do not pay-off in the near future (Matta & Beamish, 2008). By developing more risk-averse behavior, the CEO aims for secure and predictable investments, with payoffs in the near future. The origin of this conservatism lies in the psychological transitions that go with a higher age. When a CEO becomes older, he or she tends to be more risk-averse and is likely to pursue stable but low-growth strategies. There is less motivation to make riskier investments that are beneficial for the long term firm performance but which do have a negative effect on the firm’s current profitability (Barker & Mueller, 2002). Taking together; the higher the age of the
13 CEO, the more risk-averse he or she will be and therefore fewer resources will be allocated to R&D. This effect is observed even after controlling for other predictors of variations in R&D expenditures (2002). As these investments may pay off in the short-run, they do not fully capture the profits that could be obtained when the investment horizons would be extended.
Next to the declining allocation of resources to R&D, there are also other consequences described in the research by Serfling. He investigated the relationship between the age of CEOs and corporate policies. He found evidence that the relative age has severe consequences for the firm performance and the accompanied corporate policies. Older CEOs are like to make more diversifying investment and acquisitions resulting in lower overall growth strategies (2014).
Opportunistic Behavior
Besides the risk-aversion when CEOs reach a higher age, the CEO will behave opportunistically at higher ages to increase personal wealth (Dikolli et al. 2013). ‘CEOs nearing retirement may believe that managing earnings upwards (i.e. shortened temporal orientation) prior to retirement may lead to greater pay in their final years, greater value for their options, increased retirement income and more board seats in other companies. While these effects may or may not be real, it is only necessary for the CEO to believe that they will occur’ (p.58, Davidson et al. 2007). Thus, in order to fully capture the benefits of the investments the CEO, the behavior of the CEO will behave opportunistically as the benefits after his retirement do not benefit him or her personally.
Entrepreneurial Behavior
Next to the opportunistic behavior and the risk-aversion at higher ages, CEOs also have fewer incentives to express entrepreneurial behavior within the firm due to the approaching retirement (Levesque & Minniti, 2006). The younger a CEO, the more entrepreneurial behavior he or she will be demonstrating. When this behavior is combined with less need for certainty for younger CEOs, this combination tends to turn out profitable for firms over the long-term. This is caused by fewer incentives for short-term payoffs amongst younger CEOs and vice versa amongst older CEOs (Levesque & Minniti, 2006; Dikolli et al. 2013).
Results of Higher CEO Age
The personal behavior of the CEO (risk-aversion, opportunistic behavior and aversion for entrepreneurial behavior) has an effect on the resource allocation of the firm. This can be explained from a social-economical perspective, as a CEO approach a higher age, preferences will shift to walk a more conservative path (Barker & Mueller, 2002). This conservatism translates itself into declining allocations of resources to the research and development (R&D) department within the firm. Research from Barker and Mueller pointed out that younger CEOs, as opposed to older CEOs, tend to allocate a
14 larger proportion of the firm’s resources to research and development (2002). These (R&D) types of investment tend to yield beneficial future results and act as the driving force behind achieving competitive advantage and an increasing productivity by the firm (Barker & Mueller, 2002). Taking into consideration that this division tends to produce durable innovations, the investments in R&D could mitigate short-termism in the company. Next to the argument that addresses the allocation of resources, the researchers also found evidence that younger CEOs tend to invest more in the stocks of the company. As a result of these investments, the CEOs could be better aligned with the shareholders of the company implying a reduction in the agency conflicts and better aligned with the long-term profits targets of the owners of the firms (2002).
In recent research conducted by Kang, the idea whether CEOs are increasingly devoted to short-term results when they are nearing their retirement age is approached from a different perspective. By measuring commitments to corporate social responsibility, a variable that the author considers to be a long-term oriented commitment, he investigated the relationship between age and strategic investment by the CEO. Although one could argue if CSR fully captures investment horizons and (short-) long-term behavior as used in this research, the author certainly provided some interesting insights. First of all, long-term strategic investments are often neglected by CEOs in general when nearing the age of retirement, as they will conduct more myopic behavior. Such behavior is expressed by an increasing commitment to short-term results to maximize market evaluation of their performance upfront retiring. Second, this explanation of behavior by older CEOs is contrasted by their willingness to preserve the empire he or she has built during the course of tenure. This preservation behavior is dependent on the personal expectations of the CEO with regard to future career ambitions or being above the retirement age. But it general, CEOs that are nearing their retirement age do show more emphasis on short-term firm performance (2016).
CEO Tenure
Recent research of Antia, Pantzalis & Park (2010) investigated the horizon problems of the CEO in relation to the future market valuation of the firm and the movements in agency costs. The authors mentioned that observed tenures under CEOs decreased dramatically, with over 50 percent in the last two decades. This decrease in tenure in combination with more pressure on CEOs to deliver short-term results, the authors expected a short-term focus to be represented amongst chief executives in the work field: “Managers’ claim on the firm is limited to their tenure, while a firm’s lifespan is much longer. Since managerial decision horizons are limited to their expected tenure, managers approaching retirement age or about to be replaced become more “myopic”, in the sense that they tend to place less weight on cash flows occurring after their employment time horizon” (p289). The authors clarify this phenomenon by arguing a threefold argumentation: First, the tenure-driven myopia by CEOs occurring at higher ages, closer to retirement lead to an increase in the agency costs due to a shift of the time horizon with an accent on the short-run financial performance of the company. Second, they argue that
15 management choices in years prior to retirement impose greater information risks considering that CEOs that are near the age of retirement are less concerned with the future state of the company which causes a short-term vision and an increase in agency costs. At last, in line with the aforementioned arguments, they expect the market valuation of companies to rise with higher CEO age as the CEO is more focused on short-term demands.
Theory from strategic management research that is specified at the emergence of interim CEOs, can provide new insights into theory covering tenure. When firms find themselves in the situation without a suitable candidate to take on the leadership, the board appoints a temporary CEO, known as the interim CEO. These types of CEOs, who only manages the firm until a successor is decided upon, have relatively short tenure periods. In these shorter periods, they want to leave good impressions to stakeholders who are relevant, to convince them about the future well-being of the firm (Chen et al. 2016). This impression management is important, as these interim CEOs are usually appointed in tougher times when a previous CEO had failed in managing the firm effectively. Due to the limitations of the short tenure of the temporary CEO and for reasons of limited possibilities, he or she if often not able to implement major strategic initiatives. For this reason, the CEO often engages in earnings-based management, to impress relevant stakeholders by increasing the firm performance. Via the impression management the CEOs are aiming for a better reputation or a permanent position within the firm (Chen et al. 2016). Interim CEOs are becoming a common phenomenon in recent years, which may influence the decision horizons of the CEOs that are included in this research. When impression management becomes more important, so does the earnings based management vehicle to support these impressions (Chen et al. 2016). This may influence short-term behavior as earning-based management does not contribute to the long-term welfare of the company but only make short-term result seem better. As no final numbers are available for the exact number of interim CEOs in this research, it still should not be neglected, as if it were only for possible consequences on short-term emphasis by the interim CEOs.
When a CEO has its final years in office due to age or tenure, the orientation of the CEO will shift to short term company performance at the expense of long term investments (Dechow & Sloan, 1991; Chen et al. 2016; Antia et al. 2010). I therefore propose that:
H3: An increasing age and tenure of the CEO will increase the short term temporal orientation of the CEO.
A complementary study from McClellend et al. explicitly underlined that the age of the CEO on its own does not affect the future firm performance, but it does effect the performance when the CEO also possesses relatively high amount of the firm’s stock: “In terms of age, the main contingency seems to
16 be the ability of CEOs to entrench themselves with high levels of ownership when they have very short career horizons. In other words, short career time horizon plus the power conveyed by ownership can be a recipe for deteriorating future performance” (2011, p.1392). A point of criticism on this research is the sample that they were using. By focusing solely on 206 firms that were all situated in the S&P500 index, the sample can be influenced by the high amount of held stocks that is a common remuneration practice in the U.S. which may distort the causal relationship with the future firm performance. To overcome this obstacle there will be a broader integration of companies in this research that will be explained in more detail under the method section.
2.4 Anti Takeover Mechanisms
The current landscape of corporate takeovers has a strong dynamic character. After the merger wave starting from 1980 and onwards there has been an increasing activity in the market of corporate mergers and acquisitions. Usually, companies enter such a process collaboratively, but takeovers can also be hostile. Companies and boards can protect themselves from these hostile takeovers by adopting anti takeover measures (ATM) (Mahoney et al. 1997; Laverty 2004). The implementation of the mechanisms makes it more difficult for outsiders to gain control of a target firm, and the mechanisms are seen as a hurdle for the market of corporate control (Linn & McConnell, 1983). Amongst a wide variety of mechanisms that prevent a hostile takeover, the most well known are poison pills and shark repellants like super-voting stock and staggered boards. The adoption of takeover defenses has consequences for the temporal orientation of the CEO, as described by the stockholder interest hypothesis:
Stockholder interest theory
The first theory is called the stockholder interest theory which assumes that the protective measures are beneficial to the shareholders of the company and ATMs are beneficial to a firm’s long term temporal orientation. (Sundaramurthy, 2000; Mahoney et al. 1997). In the study of Sundaramurthy, four explanations are addressed that are expected to influence the temporal orientation of the CEO. First, anti takeover measures imply job-securement for the management team (i.e. CEO); in the event of acquisitions, the management team, and especially the CEO is often replaced by the acquirer. Defensive measures provide the management team with guarantees concerning employment, resulting in the commitment of long term dedication and the adoption of behavior characterized a long term oriented. This is because job-insecurity can become an obstacle in the long-run be for the firm-specific human capital investments (Dikolli et al. 2013).
Second, adapting anti takeover measures creates a climate in which long term projects and investments will be incorporated. The longer pay-off periods of long term investments are overcome when defensive measures are in place and this type of investments act as an incentive to further increase
17 the shareholder value. CEOs that are employed by these organizations are more willing to focus on long term investments as a result of the decreased risk of replacement by the provision of anti takeover defenses.
Third, the measures can generate a certain bargaining power for the management and CEO of the firm in the situation of takeovers and mergers. The takeover defenses are in principle designed to prevent hostile takeovers, but can always be offset in the case of management cooperation. This implies, that management has more negotiation power and can achieve superior deals in takeover negotiations. The last argument of the stockholder interest theory, argues that the adoption of the golden parachute, a specific type of golden parachute, is favorable to stockholders due to the remuneration of the acquiree’s management during takeovers. CEOs that are protected via a golden parachute are considered to be more objective in assessing takeover negotiations as these CEOs have fewer incentives to ensure a future position in the post-negotiation firm.
Executives who are facing the possibility of hostile takeovers will tend to rely more on short-term horizons (Kacperczyk, 2009). According to the stakeholder theory, corporations that value their surrounding stakeholders instead of merely on the shareholders, will build sustainable relationships with their environment and are likely to enhance long-term performance. The firm is dependent on its surroundings for long term profitability creation, and myopic markets tend to undervalue long-term investments (Kacperczyk, 2009). But when these firms are threatened with takeovers, the executives of these firms are forced to rely on short-term results in order to increase current stock prices to protect the firm from hostile takeovers (Kacperczyk, 2009). In the study, Kacperczyk found support for the stakeholder theory, which implies that firms with high takeover provisions, are better shielded from takeover threats: ‘firms that increase their attention to institutional stakeholders experience a subsequent increase in their long- term stock market value’ (2009: p.279).
Borokhovich, Brunarski and Parrino have pointed out in their research that ATMs protect the management and CEO from early job replacement as a result of corporate takeovers. They argue that ATMs can work as a long-term contractual protection for the CEO. This protection provides incentives for the CEO to invest in long term projects, as the beneficial outcomes derived from these projects are to be captured over the extended investment period. Risk-averse managers that are not willing to carry the risk of long term orientation, are pursued by the long-term contract to alter their orientation to riskier, long-term investments as they are well protected from the market of corporate control (1997).
When anti takeover provisions are implemented, the CEO has less exposure to unemployment risks and CEOs are relieved from short term market pressures by the market for corporate control (Sundaramurthy, 2000; Kacperczyk, 2009; Wanasika & Limbu, 2015). In accordance with the
18 stockholder interest theory, the implementation of ATMs elevates the pressure on CEOs for short-sighted temporal orientation. Therefore, I expect that:
H4: Anti takeovers measures are negatively related to the relationship between independent variables and the short term temporal orientation within the firm.
3. METHODLOGY
In the previous section, I explained the relationship between CEO pay structures and how they relate to short-term temporal orientation of executives. Also the tenure and age of CEOs have been discussed and how this can influence the relationship between the CEO and temporal orientation. As last the adoption and consequences of anti takeover provisions are discussed, and how this moderator has its own influence on the CEO and the temporal orientation of the company.
In this section, the collection of the data will be described in order to test the aforementioned relationships. I will describe how the data is collected and how the different variables are measured and will be analyzed.
3.1 Data Sources & Timeframe
Short term temporal orientation is a phenomenon that can be observed in many different types of firms, ranging from listed firms to healthcare, to education and even governmental organizations. This research will focus on the first type of organization, for several reasons. First of all, these firms are publicly traded and investors can be widely dispersed. As greater parts of society are affected by these corporations their results are relevant for a greater public of investors and other stakeholders. Second, the amount of information on these type of firms is made readily available, what contributes to the amount of data collection in this research, which in turns positively impacts the reliability of the conducted research.
The collection of the data consisted of two parts. The data collection of the salaries, stock options and company financial information is extracted from S&P’s ExecuComp. This database that collects data from companies worldwide, mainly financials, and covers medium and large sized firms. This database the collected data covers the exact data on four components of the CEO compensation schemes included in this research: bonus, salary, total compensation exercisable & unexercisable options, age and tenure. Next to the ExecuComp database there is also S&P’s Capital IQ database which provides detailed financial information on companies derived from a variety of sources. Capital IQ was consulted for more detailed financial information, in order to accurately describe the companies’ financials and to collect data on the control variables: return on assets (ROA), firm size (Assets & Market Value), CEO
19 stock holdings (ST OPTIONS) and the moderator, anti takeover measures (ATM Score). For generalizations purposes it is important to include a large number of firms in order to rule-out company specific fluctuations in the dataset.
For the second part of my dataset, that covers the dependent variable temporal orientation, my supervisor provided me with data that included over 8000 companies. This data is extracted from annual reports and conference calls transcripts between analysts. These reports and transcripts are subjected to a quantitative content analysis, in order to subtract data about a firm’s temporal orientation.
The companies that are included in this research are selected on the basis of the information about temporal orientations as provided by my supervisor. The companies were marked with a ticker, which is the symbol on the exchange on which the stocks are traded. As these tickers can change over time, and the data is collection covers the years 2007-2014 there has been a check performed if the tickers did still match the companies currently included in the databases. As the collected data by ExecuComp did not cover all companies, and even then some companies had to be excluded for lacking sufficient information, the total amount of companies of which the data provided sufficient information amounts to 1765. From these companies are 701 listed on the NASDAQ stock exchange and 1064 were listed on the New York Stock Exchange (NYSE). I chose to group the variables of both stock exchanges, in order to rule-out differences between the stock exchanges derived from a variety in their compensation practices stemming from contrary practices on compensation formation. (Companies listed on the NYSE are required to have an independent committee that decides on compensation standards, an internal audit function and guidance of corporate governance. Companies that are listed on the NASDAQ do not require a compensation committee, internal auditing nor guidance on their corporate governance. Companies in the NASDAQ are able to decide upon executive compensation via a majority of independent directors.)
3.2 Operationalizing of the Variables
Independent variable
Temporal Orientation. The data on temporal orientation is based on DesJardine & Bansal (2015)
method of content analysis. Content analysis is being used for extracting data from transcript conference calls between the CEO and the firm’s analysts. This method contributes to proper insight on the temporal orientation of the CEOs included in this research. Using content analysis gives a thorough insight in the CEOs orientation as a reflection of his behavior, thoughts, intentions and ideas. The data on temporal orientation is compiled from annual reports and quarterly earnings conference call transcripts between executives and analysts. For listed firms, this data is publicly available on company’s website or is accessed via the database of Thomson Reuters. These archival data on
20 transcripts and reports are then subjected to linguistic analyses to interpreted the managerial temporal orientation. By making use of these data sources, it is possible to extract the underlying meaning of a large database of written texts that prevail the temporal orientation by quantifying the meaning. The transcripts do cover plenty of information on the firm’s long and short-term orientation as this is often a central point of discussion in the conference calls. DesJadine & Bansal propose a five-step method in order to capture the right data on temporal orientation (2015):
Step 1 – compiling a comprehensive dictionary of keywords
By exploring company’s websites, conference calls annual reports and press releases, a database is created by words that give a clear indication of the temporal orientation in either short or long term. Step 2 – categorizing keywords into short and long term.
Step 3 – validating keywords in context.
Step 4 – computing organizational time horizon.
Temporal orientation = # of short time horizon words + # of long time horizon words # of Long time horizon words
Step 5 – validating the measure.
As the time horizon gives a ratio on a continuum between 1 and 0 which indicates long and short-term temporal orientation respectively, a higher ratio indicates a longer time horizon, and a lower ratio a shorter temporal orientation of the executive and thus more focus on short-term results. In an ideal situation, the conference calls were present for all companies on all quarters for all the years, but this was not always the case. By making use compiled data on a yearly basis, the obstacle was overcome of missing quarterly reports. The outcomes of the formula are adjusted to smoothen statistical analyses. The outcome of the formula is transformed by subtracting the outcome from 1, meaning that higher values indicate a larger proportion of short term words used in the conference calls as compared to long term words (1= only referred to short term results, and 0= only referred to long term results). With this transformation, the variable is named ‘CEO ST’ hereafter.
The downside of the content analysis method, is its replicability, as researchers often have to make judgments on whether words actually refer to a form of temporal orientation. Therefore, replicability can also be an issue when using this method for analyzing CEOs orientations. The database, Thomson Reuters, was accessed by the supervisor of this research, who also contributed a well-designed content analysis for this research. Due to time constraints to collect this data on my own, the supervisor hereby gave me the opportunity to include a long list of companies in this research, as the content analysis is a time-consuming method.
21 Dependent Variables
Short term compensation (ST Comp). The total compensation of an executive can be divided into
three broad categories that are either short-term compensation (base salary and bonus), long-term compensation (e.g. long-term incentive plan, deferred bonus and stock options) or fall into the category of other (e.g. pension, insurance). The short-term compensation does not provide any incentives for the CEO to boost long-term firm performance in contrast to the long-term compensation plan, that is designed to incentivize executives over the long run (Geiller et al. 2009; Finkelstein & Boyd, 1998). To calculate the short-term compensation of the CEO, a simplified method of Gopolan et al. 2014 will be used. In their paper they describe how the long-term compensation can be accurately measured, however, due to the high level of statistics used in the method a more simplified version is used in this paper:
Short term compensation ratio= 45678 897: ;6:<9=4>8?6= ($) C5678 897:DE6=F 897: ;6:<9=4>8?6= ($)
The short-term incentive of the salary and bonuses will be divided by the fixed total amount of compensation. This equation provides an indication on a scale from 0 to 1, whereby higher values indicate a larger proportion of short term compensation.
Temporal stocks options held (ST OPTIONS). The second part of the CEO remuneration data that is
dealt with in this research are the number of exercisable stocks over unexercisable stocks in line with the research of Souder & Shaver (2010). They found evidence that exercisable stocks work as incentives for short-term investments and unexercisable stock options held work as long term incentives for managers. I will combine their theory on stock options to include the ratio between exercisable and unexercisable stock options. The outcome of the equitation acts as an indication of incentives for short term temporal orientation. This equitation is summarized by:
Temporal stocks options held = value exercisable options + unexercisable options value of exercisable options
This equitation will provide answers on a scale from 0 to 1 whereby higher numbers (closer to 1) indicate more exercisable options over unexercisable options and thus more incentives for short-term temporal orientation and lower numbers vice versa.
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DH (Age & Tenure). For the influence of age and tenure, describes as decision horizon (DH) by Antia
et al, the age and the tenure of the CEO relative to the industry mean are the bases for the formula. Older CEOs are expected to behave in ways that serve the short-termism and are not beneficial for measuring long-term future plans. This variable is measured according to the method used by Antia et al. (2010):
‘DHi,t = [TENUREind,t – TENUREi,t] + [AGEind,t – AGEi,t]
where TENUREi,t is the number of years the CEO has held that position and AGEi,t is the age of the CEO who work for firm i in year t. TENUREind,t and (AGEind,t) is the industry median of TENURE (AGE). Given that the DH measure is an industry–adjusted measure, it can take either positive or negative values. A positive value indicates that the CEO’s expected tenure is longer than the industry median because the CEO is younger and/or has not been in his/her current position as long as the industry median. Similarly, a negative value indicates that the expected tenure is shorter than the industry median because the CEO is older and/or been in his/her position for longer time than the median competitor firm’s CEO’.
In the study, the authors explain how the measurement of the variable may not be optimal but it does take into account both the age and the tenure of the CEO. The authors used the industry median for both the tenure and age, and did not exclude the CEOs that are still working for the company. This may distort both the measurement of the mean age and tenure, as these CEOs will lower the mean for both tenure and age. Therefore, in this research, the CEOs that are still actively working for the company are excluded when calculating both tenure and age, whereby a more precise measurement of the expected tenure and age arises.
Moderating variable
Anti-takeover measures (ATM Score). Takeover defense provisions are used by Gomers et al. in 2003
to design an index for corporate governance, where they made a scale in order to measure shareholder’s rights. The data used in their paper to design this scale, which is highly influential tin the field of measuring these shareholders’ rights, is extracted from the Investor Responsibility Research Center database (IRRC). But, the IRRC ceased the data collection after 2006 and new data on WRDS ISS is not comparable. Therefore, the well known G-index is not applicable to this research.
Instead, Capital IQ allows to screen for corporate defense mechanisms. Provisions such as poison pills, anti-greenmail provision, blank check, preferred stock, and dual class stock are all taken into account. S&P calculates a score that quantifies the different defensive mechanisms that reflect how well the firm is defended against (hostile) takeovers. For the companies included in this research, the average defense score was calculated per exchange. After this calculation, the defense score for every single firm will be subtracted from the mean defense score, to reflect whether a firm is more or less protected against takeovers compared to the average company on the same exchange. By creating a
23 dummy variable, a firm will be assigned either 0 when the at ATM score is below average or 1 when the TDS is above the mean score. When a firm receives a score of 1 (0) it means it has more (less) takeover defenses implemented and is less (more) vulnerable to the market for corporate control compared to the average firm on the exchange.
Control Variables
I also included a number of control variables that might have their influence upon short term temporal orientation. Return on assets (ROA) refers to the equitation that divides net income by total assets. This is an indicator of the efficiency in deploying assets to generate income. It also accounts for firms adopting shortened temporal orientations following poor performance and proceeding external pressures (Souder & Shaver, 2010). Firm size may impact the temporal orientation in the sense that larger firms are more stable, this gives them the ability to look further in the future and is measured by the firm’s assets (DesJardine & Bansal, 2015). Firm value reflects the total market value of the firm as reported at the end of the fiscal years and represent the total outstanding equity and is a complementary measure of measuring the firm’s size. Also, Cash and Short-term investments compared to the book value of the assets are taking into account together with the financial leverage that equals current liabilities plus total debt divided by the total assets. These capital and debt structures of the firm may influence the temporal orientation (Kang, 2016; Gopolan et al. 2014). And the CEO stock ownership is measured as the percentage of stocks held by the CEO as a percentage of the total shares (if >1%) and excluding options (Kang et al.2016).
3.3 Statistical Analyses and Results
The result section of this research will start with a description of the data observations of the different variables, a description of the adjustments made to normalize the data, the correlations found between the variables and at last the results of the panel data regression will be described.
Normalizing Data
The first step in analyzing the relevant variables for values of kurtosis, skewness and outliers. The observations on the different variables demonstrated large spreads around the mean (SD) and a great number of outliers were observed. This is according to my expectation as different CEOs are remunerated in diverse ways (e.g. single event bonuses). The variable assets have also many outliers due to the large diversity in company sizes of which are listed on the NYSE and NASDAQ. Therefore, the data is normalized in Stata using the Winsorizing option. This option transforms statistics by excluding extreme observations (e.g. high bonuses or stock options rewarded on the basis of single time actions like large acquisitions led by the CEO). The values are winsorized with limits set at 1%-99%, and thus the largest and smallest percentile are set equal to the percentile of the next observations. By
24 ruling out these extreme values, the data is more suitable for the regression and interpretation of results (Field, 2013).
The second step was a check kurtosis and skewness for (ab)normal values. The kurtosis and skewness are indicators of symmetry in the distribution of values. High positive (negative) values of skewness are an indication of the number of outliers on the right (left) tail of the normal distribution (Field, 2013). The kurtosis is an indicator of the ‘peakness’ of the values, meaning that high values indicate a normal distribution where a great deal of the variance is caused by extremely high values (Field, 2013). In Table 1 the skewness and kurtosis for the independent variables assets, market value and the options held by CEO show high positive values of skewness and kurtosis. It is important that the variables are normally distributed to be further analyzed.
The dependent variable CEO ST also shows a moderately negative skewness (=-.59), that implies more data observation in the left tail of the normal distribution. The dependent variable needs to be close to a normal distribution. in order to make further analyses. Skewness and kurtosis values for ST OPTIONS and ST COMP are irrelevant presents a ratio between exercisable and unexercisable stocks with values between 0-1. However, it is impossible to make logarithmic transformations of zero or negative values and thus a log of (X+1) is taken from CEO ST (independent variable: short term temporal orientation). This transformation is an excellent tool to reduce positive skews and leptokurtic for making patterns in the data more visible (Field, 2013). Also, the logarithmic transformation is taken to enhance the applicability for regression and the interpretation of results. The item DH Age & Tenure reported a kurtosis of 4.28, but this item is not scaled and therefore no conclusion can be drawn on the basis of the descriptive statistics.
Descriptive Statistics
In table 1 the descriptive statistics of all variables are showed. The mean, standard deviation, kurtosis, skewness and the interquartile of this study are provided for the dependent, independent, control and the underlying variables.
The total amount of firms included in the initial data set was 1765. From the total amount of firms, 1064 were listed on the NYSE and 701 were listed on the NASDAQ. The firms are spread well over the different industries for both stock exchanges, with the exception for the utility industry sector in the NASDAQ where no observation are made. Another noteworthy finding of the collected data is the average increase of salary from year-to-year. The average salary increase amounted to 19% for all firms, which indicates high growth numbers in the base salary of the CEOs.
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Table 1
Overview initial sample
Industry NASDAQ NYSE Grand Total
Consumer Discretionary 117 178 295 Consumer Staples 23 56 79 Energy 12 87 99 Financials 92 229 321 Healthcare 114 71 185 Industrials 68 181 249 Information Technology 243 87 330 Materials 17 105 122 Telecommunication Services 15 6 21 Utilities - 64 64 Grand Total 701 1064 1765
When we look at table 2, the independent variable ST COMP the mean for the ratio was M=0.27 (SD=0.21) implying that on average the CEOs earned 27% percent of their total compensation in the via short-term compensation. For the item DH(Age&Tenure) the mean was M=1.03 (SD=11.03) which are low numbers. These low numbers are in line with the method as described in the study of Antia, Pantzalis & Park because ‘DH is computed as the sum of tenure and age after adjusting for the industry median values’ (2010: p.292). The independent variable ST Temporal Options averaged at .50 (SD=.41) meaning that the average portfolio of options that is held by the CEO contains 50% exercisable options. For the moderator, ATM Score, the average observed value was .33 (SD=.11) meaning that the average firm was graded with a score of .33 by S&P for the implementation of takeover defenses in relation to their peers. For CEO ST, the dependent variable, the average CEO ratio was .86 (SD=.86) which implies that on average 86% of the words used by the executive that had a temporal orientation referred to the short-term temporal orientation.
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Table 1
Mean, Standard deviation, Min, Max, Skewness, Kurtosis
M SD Min Max Skewness Kurtosis
1*. Salary 826 360 .01 2650 .89 4.93 2*. Bonus 192 644 0 5054 4.85 25.69 3*. Total Comp 5868 5536 212 36851 2.09 8.55 4. ST COMP .27 .21 .01 .99 1.66 5.28 5*. Exercisable Stocks 7200 729 0 143284 4.23 25.11 6*. Unexercisable Stocks 2074 5196 0 47145 4.55 28.46 7. ST OPTIONS .50 .41 0 1 -.11 1.31 8. Tenure (years) 10.37 8.84 0.39 44.02 1.71 9. Age (years) 55.8 6.8 38 76 .14 2.95
10. DH (Age & Tenure) 1.03 11.03 -42 24 -1.04 4.82
11. ATM Score .33 .11 0.13 0.61 .40 2.55 12. CEO ST .86 .86 0.66 1 -.59 3.3 Control Variables 1*. Assets 13951 2982 81 308854 5.36 35.23 2. ROA .04 .09 -.51 .29 -1.62 11.59 3*. Market Value 8872 21563 34z 194369 5.07 32.87 4*. ST investments .12 .06 0 .70 1.69 5.64
5. Options held by CEO (%) 1.69 4.31 0 49 5.09 36.37
6. Financial Leverage (%) .16 .18 0 .87 1.12 3.19
*Values described are expressed in thousands of dollar amounts.
When the control variables are considered, the average assets of the firms observed is $13,951,000 (SD=2982) for the large firms that are listed on both stock exchanges. The mean return on assets was 4% with a standard deviation of 9%. The large standard deviation could be explained by the fact that the data covers 8 years, that also included the years when the world was impacted by a global financial crisis, which had a severe impact on large stock exchanges. The market value of the average firms entailed $8,872,000 (SD=21563). Again a large standard deviation. But the fact that the market value is calculated by the total shares outstanding, again the impact of the global financial crisis is an explanation of the large standard deviation as stock prices showed great fluctuations over the past years. The average firm invested 12% in short-term investments (SD=.06) compared to their assets. The average CEO held 1.69% of the company’s total stocks, with a standard deviation of 4.31%. At last, the financial leverage, which is calculated by dividing debt including current liabilities by the total assets of the firm, showed an average of 16% and a SD of 18%, caused by the great variety of firms from many different industries.
Correlations
Table 2 shows the standard correlation with the accompanied level of significance. When we look at CEO ST, one can see a correlation with all other variables except for the CEO’s age, the ratio of exercisable stock options held by the CEO (ST OPTIONS) and the ROA. The missing correlation with
