This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent's private trading decisions in incentive creation. With option-based compensation contracts, the average pay-forperformance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure implies that the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to "indexing" the stock or option grant, making explicit indexation of the contract redundant.

This study investigates the relationships among corporate governance mechanism, firm performance, and executive compensation within Chinese publicly listed firms. The corporate governance structure in China is a unique combination of the Anglo-American model and the German system by including a board of director and a supervisory board simultaneously, and has two monitoring organs, independent directors and supervisory board, co-existing. One of the special features of the Chinese publicly listed firms is their close relationship with the government because most of them were converted from state-owned enterprises at the beginning of the market-oriented economic reform in China. Therefore, we attempt to explore the effects of political connections of their ultimate controllers on corporate governance mechanism, on firm performance, and on executive compensation in China. Our findings indicate a dysfunctional corporate governance system in China, which cannot bring improved firm performance but grant executives high compensations. While we take into consideration the political connections, our results show that they deteriorate corporate governance mechanism, but do not result in inferior firm performance. Robustness tests demonstrate a non-linear effect of corporate governance on executive compensation, jointly depending on the status of a firms political connection and its ownership structure.

In the first chapter, I study a recent and important innovation, the shift towards independent compensation consultants that provide advice only to boards. I construct a theoretical model to conceptualize the potential impact of independent consultants and then develop an empirical strategy to quantify the impact. One contribution of the paper is to provide strong identification of the impact of independent advice, something that has been challenged by the lack of appropriate data. I use a unique sample of Canadian firms which allows me to directly measure the impact of non-compensation related consulting fees on compensation advice. I conduct a number of empirical experiments but the main tests exploit a "quasi-natural experiment" provided by the creation of an independent consultant, Hugessen Consulting, as a spin-off from Mercer. I show that switching from an a ffiliated consultant to an independent consultant is associated with an increase in managerial incentives. Despite the benefits of independent advice, independent consultants may not be hired due to higher fees, the influence of powerful CEOs, or because boards already possess adequate expertise. In the second chapter, using a simple model of incentive contracting as a guide, I examine empirically whether some aspects of executive stock option backdating may be an optimal response of firms to distortions in the institutional environment, in particular tax law and accounting rules. Some of the findings suggest that firms may attempt to effi ciently lower the exercise price of the executive options in order to enhance managerial incentives for risk averse and poorly diversified executives. In the presence of restrictive accounting and tax rules, backdating may be a mechanism by which to achieve this objective of better incentives. Consistent with this explanation I find that backdating is associated with lower CEO pay levels but higher CEO incentives. In the final chapter, I use a dynamic structural model to show that on average firms excessively smooth their payout while maintaining larger than optimal levels of cash (excess cash) on their balance sheets. I provide an agency explanation for the positive correlation between dividend smoothing and cash savings. I show that the dynamic effect of managerial perceived cost to cutting payout results in accumulation of excess cash and distortion of shareholder value.

The Financial Accounting Standards Board (FASB)/ International Accounting Standards Board (IASB) proposed Conceptual Framework solidifies stewardship as a primary financial reporting objective. Concurrently, fair value (FV) continues to be emphasized in FASB and IASB standards. In this study, using data from real estate firms in the UK, I test whether FVs provide stewardship-relevant information incremental to information provided by historical costs. Measuring stewardship by changes in CEO cash compensation and FVs through revaluations of investment properties, I find FVs provide stewardship information beyond historical costs; however, FVs must be supported by external appraisals to be useful. Further, FVs help to explain the traditional association between stock returns and compensation. The actual realization of FV changes through sale continues to be rewarded through compensation, meaning the full compensation value of FV changes is not given until realized. FV changes provide more useful stewardship information when FV estimates are of higher quality or when the CEO is more strongly governed. I also find that higher sensitivity to management effort, proxied by firm growth opportunities, makes FV changes more stewardship-relevant. Overall, I conclude that for UK real estate firms, FVs are useful for assessing management's stewardship with improvements in estimate quality and sensitivity to management effort increasing stewardship-usefulness; however, historical costs continue to be relevant for stewardship. My thesis provides insight into what information best captures management stewardship.

This study investigates the relationships among corporate governance mechanism, firm performance, and executive compensation within Chinese publicly listed firms. The corporate governance structure in China is a unique combination of the Anglo-American model and the German system by including a board of director and a supervisory board simultaneously, and has two monitoring organs, independent directors and supervisory board, co-existing. One of the special features of the Chinese publicly listed firms is their close relationship with the government because most of them were converted from state-owned enterprises at the beginning of the market-oriented economic reform in China. Therefore, we attempt to explore the effects of political connections of their ultimate controllers on corporate governance mechanism, on firm performance, and on executive compensation in China. Our findings indicate a dysfunctional corporate governance system in China, which cannot bring improved firm performance but grant executives high compensations. While we take into consideration the political connections, our results show that they deteriorate corporate governance mechanism, but do not result in inferior firm performance. Robustness tests demonstrate a non-linear effect of corporate governance on executive compensation, jointly depending on the status of a firms political connection and its ownership structure.

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The Financial Accounting Standards Board (FASB)/ International Accounting Standards Board (IASB) proposed Conceptual Framework solidifies stewardship as a primary financial reporting objective. Concurrently, fair value (FV) continues to be emphasized in FASB and IASB standards. In this study, using data from real estate firms in the UK, I test whether FVs provide stewardship-relevant information incremental to information provided by historical costs. Measuring stewardship by changes in CEO cash compensation and FVs through revaluations of investment properties, I find FVs provide stewardship information beyond historical costs; however, FVs must be supported by external appraisals to be useful. Further, FVs help to explain the traditional association between stock returns and compensation. The actual realization of FV changes through sale continues to be rewarded through compensation, meaning the full compensation value of FV changes is not given until realized. FV changes provide more useful stewardship information when FV estimates are of higher quality or when the CEO is more strongly governed. I also find that higher sensitivity to management effort, proxied by firm growth opportunities, makes FV changes more stewardship-relevant. Overall, I conclude that for UK real estate firms, FVs are useful for assessing management's stewardship with improvements in estimate quality and sensitivity to management effort increasing stewardship-usefulness; however, historical costs continue to be relevant for stewardship. My thesis provides insight into what information best captures management stewardship.

This thesis examines the causes of financial malfeasance in the largest U.S. telecommunications corporations between 1995 and 2004. Specifically, it examines whether or not the executive compensation package influences the likelihood that a corporation will falsify its financial statements. The methods used are both qualitative and quantitative. I approach the question form a historical point of view and attempt to identify certain salient characteristics within the telecommunications industry that may influence of unethical or illegal activity. The findings support organizational-political embeddedness theory, which suggests that differential social structures create dependencies, incentives, and opportunities to engage in financial malfeasance. The historical analysis shows that neoliberal policies enacted in the mid-1990s resulted in organizational and political structures that permitted managers to engage in financial malfeasance while limiting the efficiency of regulatory bureaucracies. The quantitative analysis yields mixed findings, many of which are consistent with previous research on white-collar crime and financial malfeasance. This article adds to existing literature by outlining significant public policy shifts and the results those shifts may have on specific industries. These findings have important implications for political officials and corporate oversight organizations.

In the first chapter, I study a recent and important innovation, the shift towards independent compensation consultants that provide advice only to boards. I construct a theoretical model to conceptualize the potential impact of independent consultants and then develop an empirical strategy to quantify the impact. One contribution of the paper is to provide strong identification of the impact of independent advice, something that has been challenged by the lack of appropriate data. I use a unique sample of Canadian firms which allows me to directly measure the impact of non-compensation related consulting fees on compensation advice. I conduct a number of empirical experiments but the main tests exploit a "quasi-natural experiment" provided by the creation of an independent consultant, Hugessen Consulting, as a spin-off from Mercer. I show that switching from an a ffiliated consultant to an independent consultant is associated with an increase in managerial incentives. Despite the benefits of independent advice, independent consultants may not be hired due to higher fees, the influence of powerful CEOs, or because boards already possess adequate expertise. In the second chapter, using a simple model of incentive contracting as a guide, I examine empirically whether some aspects of executive stock option backdating may be an optimal response of firms to distortions in the institutional environment, in particular tax law and accounting rules. Some of the findings suggest that firms may attempt to effi ciently lower the exercise price of the executive options in order to enhance managerial incentives for risk averse and poorly diversified executives. In the presence of restrictive accounting and tax rules, backdating may be a mechanism by which to achieve this objective of better incentives. Consistent with this explanation I find that backdating is associated with lower CEO pay levels but higher CEO incentives. In the final chapter, I use a dynamic structural model to show that on average firms excessively smooth their payout while maintaining larger than optimal levels of cash (excess cash) on their balance sheets. I provide an agency explanation for the positive correlation between dividend smoothing and cash savings. I show that the dynamic effect of managerial perceived cost to cutting payout results in accumulation of excess cash and distortion of shareholder value.

Public criticism of executive pay has increased significantly in recent years. Shareholders express concern that the level of pay to many executives does not match the level of increase in shareholder wealth. The government has even gotten involved in the issue by changing tax laws related to compensation and taking an interest in how compensation is recorded in financial statements. This study investigates the relationship between adoption of compensation components and improved firm performance. Specifically, performance and restricted stock plan adoptions are analyzed for nine industries. Variable change is analyzed pre and post adoption for adopters; these adopters are then compared to non-adopters and to non-adopting peers. Data were gathered from COMPUSTAT and analyzed using four statistical methods; ttests, analysis of variance, multivariate analysis of variance and analysis of means. The study covers 20 years of adoptions and involves 335 adopting firms. Results of the study indicate that, when solely analyzing adopters, adoptions of performance or restricted stock plans improve firm performance for some industries but not for others. The study further indicates for most industry groups, the improvement experienced by adopters is not as significant as the improvement realized by the non-adopting segment of the industry. Lastly, when adopters are compared to non-adopting peers the study finds peers perform as well as or better than adopters. These results imply adoption of restricted stock plans works as intended for some industries by improving firm performance but may not improve performance to the levels reached by the industry as a whole. / Ph. D.