Transient Institutional Ownership and the Contracting Use of Returns and Earnings
ABSTRACT Prior work suggests that, on average, institutional ownership is associated with increased pay-for-performance sensitivity of CEO compensation. However, other studies find that transient institutional ownership is positively associated with myopic managerial actions (Bushee 1998), stock price volatility, and stock mispricing (Bushee 2001). Consequently, the type of institutional ownership may affect the performance measure properties and undermine their usefulness for CEO contracting purposes. In this paper, we posit that transient institutional ownership is negatively associated with the congruence and noise properties of both returns and earnings and, hence, the use of these measures for incentive compensation. Consistent with this conjecture, we find that transient institutional ownership is negatively associated with the sensitivity of CEO cash compensation to both of these measures. Our findings indicate that given a 10% increase in return on equity, the cash compensation of a CEO of a firm with low transient ownership will increase by approximately 3%, while that of a firm with high transient ownership will only increase by approximately 1%.
Full-textDOI: · Available from: Susan L Kulp, May 29, 2015
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ABSTRACT: This paper examines whether institutional investors exhibit preferences for near-term earnings over long-run value and whether such preferences have implications for firms' stock prices. First, I find that the level of ownership by institutions with short investment horizons (e.g., “transient” institutions) and by institutions held to stringent fiduciary standards (e.g., banks) is positively (negatively) associated with the amount of firm value in expected nearterm (long-term) earnings. This evidence raises the question of whether such institutions myopically price firms, overweighting short-term earnings potential and underweighting long-term earnings potential. Evidence of such myopic pricing would establish a link through which institutional investors could pressure managers into a short-term focus. The results provide no evidence that high levels of ownership by banks translate into myopic mispricing. However, high levels of transient ownership are associated with an over- (under-) weighting of near-term (long-term) expected earnings, and a trading strategy based on this finding generates significant abnormal returns. This finding supports the concerns that many corporate managers have about the adverse effects of an ownership base dominated by short-term-focused institutional investors.Contemporary Accounting Research 05/2001; 18(2):207 - 246. DOI:10.1506/J4GU-BHWH-8HME-LE0X · 1.43 Impact Factor
Journal of Accounting Research 01/1981; 27(1):21-39. DOI:10.2307/2491205 · 2.38 Impact Factor
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ABSTRACT: We find that measures of board and ownership structure explain a significant amount of cross-sectional variation in CEO compensation, after controlling for standard economic determinants of pay. Moreover, the signs of the coefficients on the board and ownership structure variables suggest that CEOs earn greater compensation when governance structures are less effective. We also find that the predicted component of compensation arising from these characteristics of board and ownership structure has a statistically significant negative relation with subsequent firm operating and stock return performance. Overall, our results suggest that firms with weaker governance structures have greater agency problems; that CEOs at firms with greater agency problems receive greater compensation; and that firms with greater agency problems perform worse.Journal of Financial Economics 02/1999; 51(3):371-406. · 3.72 Impact Factor