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Effects of Changes in Executive Compensation – In the Light of the Financial Crisis

Fiehn, Sara LU and Struck, Henriette LU (2010) NEKM03 20101
Department of Economics
Abstract (Swedish)
Executive compensation is one of the most widely discussed topics since the latest economic turmoil. Shortly after the S&P 500 decreased by almost 50 percent in fall 2008, 70 percent of the 200 largest corporations in the United States reported changes in compensation packages for their executives. This study gives the reader an empirical insight into the stock market reaction following the announcement of these changes. Applying the event study methodology we analyzed 69 corporations and the corresponding stock price movements around the announcement date. The results show that the market does not react significantly on the announcement of changes in executive compensation. Shareholders do not seem to perceive these adjustments as... (More)
Executive compensation is one of the most widely discussed topics since the latest economic turmoil. Shortly after the S&P 500 decreased by almost 50 percent in fall 2008, 70 percent of the 200 largest corporations in the United States reported changes in compensation packages for their executives. This study gives the reader an empirical insight into the stock market reaction following the announcement of these changes. Applying the event study methodology we analyzed 69 corporations and the corresponding stock price movements around the announcement date. The results show that the market does not react significantly on the announcement of changes in executive compensation. Shareholders do not seem to perceive these adjustments as fundamental and do not seem to expect an additional increase in the firm´s future value following the change. Nevertheless the study identifies that a decrease in short-term incentives is perceived as negative by the market. This reaction is oppositional to the public discussion which suggests that short-term incentives should be limited. The paper provides an indebt analysis of the difference in market reaction following short- and long-term incentive changes. Furthermore the results substantiate that companies with a poor past performance and profitability react stronger upon the announcement of changes in executive compensation. (Less)
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author
Fiehn, Sara LU and Struck, Henriette LU
supervisor
organization
course
NEKM03 20101
year
type
H1 - Master's Degree (One Year)
subject
keywords
Executive Compensation, Market Reaction, Financial Crises, Agency Problems, Event Study
language
English
id
1623119
date added to LUP
2010-06-23 10:52:04
date last changed
2010-06-23 10:52:04
@misc{1623119,
  abstract     = {Executive compensation is one of the most widely discussed topics since the latest economic turmoil. Shortly after the S&P 500 decreased by almost 50 percent in fall 2008, 70 percent of the 200 largest corporations in the United States reported changes in compensation packages for their executives. This study gives the reader an empirical insight into the stock market reaction following the announcement of these changes. Applying the event study methodology we analyzed 69 corporations and the corresponding stock price movements around the announcement date. The results show that the market does not react significantly on the announcement of changes in executive compensation. Shareholders do not seem to perceive these adjustments as fundamental and do not seem to expect an additional increase in the firm´s future value following the change. Nevertheless the study identifies that a decrease in short-term incentives is perceived as negative by the market. This reaction is oppositional to the public discussion which suggests that short-term incentives should be limited. The paper provides an indebt analysis of the difference in market reaction following short- and long-term incentive changes. Furthermore the results substantiate that companies with a poor past performance and profitability react stronger upon the announcement of changes in executive compensation.},
  author       = {Fiehn, Sara and Struck, Henriette},
  keyword      = {Executive Compensation,Market Reaction,Financial Crises,Agency Problems,Event Study},
  language     = {eng},
  note         = {Student Paper},
  title        = {Effects of Changes in Executive Compensation – In the Light of the Financial Crisis},
  year         = {2010},
}