Three Essays on Executive Compensation - KOPS - Universität ...

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Profit Sharing with Executives (3.7 percent). The average cash ratio is lowest in Utilities (1.3 percent), Telecommunications (1.5 percent) and the Media sector (1.9 percent). This industrial pattern is similar for the bonus ratio. Finally, Table 3.1 reveals that for individual firms the cash ratio can be as high as 88.1 percent (79.4 percent for the bonus ratio) in the Industrial Goods & Services sector, whereas no top-five executive team in the Telecommunications and Utilities sectors receives more than 11.7 and 17.4 percent, respectively, in any year (9.9 and 9.6 percent for the bonus ratio). Hence Table 3.1 suggests to control for industry and time effects in the regression analysis. To test our set of hypotheses we use firm-level data from Datastream as explanatory variables. Table 3.2 in the appendix provides a summary of the variables used in this study. In all regressions we add year dummies and industry dummies based on the two-digit supersector Industry Classification Code (ICB), and adjust all monetary variables for inflation. We briefly describe the explanatory variables and discuss the expected relation with the top management’s cash-flow share. To test Hypothesis 1a, we measure investment activity and investment opportunities by the following variables: Capital intensity. Firms with high capital expenditures (relative to firm size measured by total assets) are expected to run a more capital-intense business model. We use this measure to proxy investment activity. Hypothesis 1a implies a negative relation between capital intensity and the top management’s cash-flow share 21 (cash ratio and bonus ratio). R&D intensity. Another proxy for investment activity are expenditures for research and development (R&D) relative to firm size. We expect that firms with a high R&D intensity retain cash for investments and allocate a lower fraction of cash flows to the top management. Hypothesis 1a implies a negative relation between R&D intensity and the top management’s cash ratio and bonus ratio. Contrary to Hypothesis 1a, however, the profit sharing literature suggests a positive relation between R&D intensity and the bonus ratio. The argument is that earnings participation of employees is more prevalent in firms with high R&D intensity, because R&D requires cooperation and interaction which is fostered by employee participa- 21 We measure capital expenditures relative to firm size to ensure that the estimated relation to the top management’s cash-flow share is not affected by a (negative) firm-size effect. 125
Profit Sharing with Executives tion schemes. Market-to-book ratio. The market-to-book ratio is often used as an indicator for investment opportunities (e.g. in Smith and Watts (1992), Gaver and Gaver (1993) or Ryan Jr and Wiggins III (2002)). Firms with a high market-to-book ratio trade at a surplus because they are expected to have productive investment opportunities that yield high earnings in the future. Typically such firms pay small dividends and keep profits as retained earnings for future investments. We hypothesize that firms with a high market-to-book ratio also pay a lower fraction of cash flows to the top management, because such firms allocate cash neither to shareholders nor to the top management, but retain it for future investment. Again Hypothesis 1a implies a negative relation between the market-to-book ratio and the fraction of cash paid to the top management. Sales growth. An indirect measure for investment opportunities is sales growth. The top management’s cash-flow share may be higher in growing firms, because such firms typically grant their managers more discretion in choosing investment projects. This is accompanied by higher compensation (Gaver and Gaver, 1993) and a tighter link between compensation and outcomes (Prendergast, 2002). Hence we expect that the top management’s cash-flow ratio is higher in firms with higher sales growth. Hypotheses 1b (interest to creditors) and 1c (dividends for shareholders) address the relation between the managerial fraction of cash flows and corporate financing. We use the following variables: Interest payments. Hypothesis 1b implies a negative relation between interest payments (relative to firm size) and the managerial cash-flow share. Leverage ratio. Interest payments are related to the level of indebtedness. Firms with a higher leverage (debt-to-equity) ratio are expected to pay a higher fraction of cash flows to creditors. Ceteris paribus, a lower fraction is left for the top management. This calls for a negative relation between leverage and the managerial cash-flow share. Dividend payments. Hypothesis 1c implies a negative relation between dividend payments (relative to firm size) and the managerial cash-flow share. 126
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Three Essa
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Contents Vorwort Contents List of T
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CONTENTS 3.5.1 Determinants of the
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LIST OF TABLES 2.9 Cash Bonuses and
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Summary Chapter 1, Executive Compen
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Summary top management’s cash-flo
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Zusammenfassung nehmensmerkmale, so
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Zusammenfassung zurückliegender Ja
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Executive Compensation and Firm Per
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