Yi Feng’s research while affiliated with Toronto Metropolitan University and other places

We investigate how director networks impact IPO characteristics and find that firms with better-connected directors have higher IPO market valuation, more positive offer price revisions, higher first-day returns, more pre-IPO media coverage, and superior post-IPO stock performance. Director networks are beneficial to the share offering because corporate directors help facilitate information exchange with prospective investors, attract their attention to the IPO, and maintain and grow their interest after the IPO.

This paper investigates the effect of CEO equity incentives on corporate spin-off decisions. We find that CEOs with stronger equity incentives are more likely to engage in corporate spin-offs and the announcements of such spin-offs are positively received by the market, as evidenced by both positive short-run (announcement effect) and long-run abnormal stock returns. Furthermore, the level of incentives matters for future stock performance subsequent to the spin-off. While spin-off announcements from low incentive firms have a stronger announcement effect, long run stock performance following spin-offs from high incentive firms are significantly better. A potential explanation for such differences is that low incentive firms also have more independent boards and thus the disciplining effect of a spin-off is stronger in such firms, especially in the short run. While a stronger board may be more influential at implementing key corporate decisions (such as spin-offs), better incentive alignment leads to superior long run stock performance. Our results therefore suggest that while stronger corporate governance may serve as a substitute mechanism for managerial equity incentives in the short run, they are in fact complementary to each other in the long run.

We examine the impact of mandatory option expensing on managerial equity incentives. Though effective only after June 15, 2005, there is evidence that U.S. firms begin preparing for option expensing as early as 2002 by making changes to their equity incentive plans. We find that (1) CEO option incentives exhibit a sharp reversal during the period 1993-2005, with the median CEO option incentives increasing 25% a year before 2002 but declining 17% a year after 2001; (2) the reduction in option incentives after 2001 is larger for firms that use excessive levels of equity incentives prior to 2002; (3) firms make similar reductions to options granted to CEOs, other top executives and lower-level employees; (4) CEO stock incentives increase throughout the entire 13-year period, rising at an even greater rate after 2001; and (5) the increase in stock incentives after 2001 is far from offsetting the corresponding decrease in option incentives. These findings are robust to controls for firm and CEO characteristics and for concurrent regulatory, business and market events such as the Sarbanes-Oxley Act of 2002, the option backdating scandal, and the 2000 stock market crash. We also provide a theoretical explanation for the documented changes in option incentives.

This paper examines the impact of mandatory option expensing on executive compensation. Although it merely changes the way option costs are disclosed (in footnotes or expensed in income statement), mandatory option expensing may actually alter the optimal contract between firms and their CEOs. We show theoretically that CEOs' perceived personal loss from option expensing reduces (increases) the optimal level of equity-based incentives (cash compensation). Our empirical analysis of CEO compensation using ExecuComp data supports this prediction. In addition, we find that equity incentives decline more sharply in firms that provided more excessive levels of performance pay than comparable firms do. We also find evidence that the fraction of incentives derived from stock options declines as firms comply or prepare to comply with mandatory option expensing, supporting a substitution effect between restricted stock and stock options. The documented impact of option expensing is robust to alternative explanations including the impact of the Sarbanes-Oxley Act of 2002, option backdating, different measures of equity incentives, regression specifications, and estimation methods.