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
Full text not available from this repository.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.