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Performance periods in CEO performance-based equity awards : theory and evidence

Evans III, John Harry and Gao, Zhan and Hwang, Yuhchang and Wu, Wan-Ting (2018) Performance periods in CEO performance-based equity awards : theory and evidence. The Accounting Review, 93 (2). pp. 161-190. ISSN 0001-4826

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Abstract

This paper examines the length of time over which CEO performance is evaluated (the “performance period”) in CEO performance-based equity awards (PBEAs). Departing from the primary emphasis of agency theory on moral hazard problems, we develop a model in which short performance periods are instrumental in sorting CEO talents. The model predicts that short performance periods are preferred when CEOs have low expected productivity or valuable alternative employment opportunities, and when firms face high operating uncertainty or high dispersion of managerial productivity. We find empirical support for these predictions in a sample of S&P 1500 industrial firms granting PBEAs to CEOs. We also document that CEO turnover is higher for underperforming CEOs with shorter performance periods, validating the sorting role of performance periods.

Item Type: Journal Article
Journal or Publication Title: The Accounting Review
Uncontrolled Keywords: performance period ; sorting ; performance vesting ; CEO compensation ; corporate governance ; CEO turnover
Subjects:
Departments: Lancaster University Management School > Accounting & Finance
ID Code: 73037
Deposited By: ep_importer_pure
Deposited On: 24 Feb 2015 13:36
Refereed?: Yes
Published?: Published
Last Modified: 03 Jun 2018 02:24
Identification Number:
URI: http://eprints.lancs.ac.uk/id/eprint/73037

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