Did CEO’s Equity-Based Compensation Benefit Firms at All? – Evidence From the Regime Before Adoption of Statement of Financial Accounting Standards 123(R)

Abstract

Previous studies documented empirical evidence that stock- and option-based compensation exacerbates the agency problem, which is opposite to the goal of awarding such kind of compensations to executives. If the stock- and option-based compensation is so bad, why did companies previously adopt such kind of compensation method. I use data from 1992-2005, a period before the adoption of FAS 123 (R), to examine whether the stock-based and option-based compensation benefits firms at all. I find that the firms, whose CEOs received higher values of stock- and option- compensations, have higher accruals quality and more predictable reported earnings, as well as enjoy lower implied costs of equity capital.

These findings are robust to various sensitivity tests. The results indicate that such compensation method at least provided certain benefits to the firms.