Empirical studies have questioned the effectiveness of equity-linked compensation in increasing managerial ownership and improving interest alignment. In particular, studies have found that executives unwind incentives by selling shares that are acquired through equity-linked compensations. Scholars argue that such freedom to unwind incentives is undesirable as it can lead to managerial self-beneficial behaviour that harms shareholders. Under such arguments, a minimum executive shareholding policy has been proposed, which requires executives to maintain a minimum ownership of the company's shares through retaining a portion of vested equities. Core and Larcker (2002) made the first attempt to provide a preliminary understanding of the minimum shareholding policy. This thesis builds on Core and Larcker (2002) and provides a deeper understanding of a minimum shareholding policy as a corporate governance mechanism in improving managers-shareholders interest alignment. This thesis analyses minimum shareholding policy by asking three main empirical questions: What determines the policy adoption? Do executives respond to the policy by retaining more vested equity? What is the performance impact of the policy? By analysing UK firm data, I found that firms adopt the minimum shareholding policy to reverse low prior ownership and to prevent share sales that are led by managerial market-timing. Firms seem to be influenced by peer action and adopt the policy when more firms in the same size group have the policy in place. The policy is also adopted to counter potential agency problems. This takes the form of high managerial power and discretionary spending. Additionally, a larger volume of equity-linked compensation grants and vested equities also contributes to the probability of policy adoption. In quest of the second empirical question, ] first confirmed that executives indeed unwind incentives when they receive shares from newly vested equities. However, as the policy is adopted, executives tend to retain more newly vested equities if their prior period ownership is below the minimum requirement. This is in contrast to weaker share retention which is demonstrated when managerial ownership is above the minimum. This result shows that the minimum shareholding policy is effective in limiting unwinding of incentives by executives and also echoes earlier findings that policy adoption is related to a larger prior period equity-linked compensation. The result is also robust when controlling for potential self-selection bias. While policy compliance does not have significant performance implication in its own right, the degree of compliance has a significantly positive performance impact when the difference between actual holding and minimum requirement is large. This reveals that the minimum shareholding requirement is potentially too low to exert a strong performance impact. In a number of sensitivity tests, I found that such performance impact is enhanced when the pre-adoption ownership percentage is lower, or when the policy is more intense as compared to pre-adoption ownership value. The lack of evidence of proper policy enforcement on violation penalties may have explained the finding presented in this thesis that performance does not respond significantly, albeit negatively, to policy violation. I argue that, although managers begin by complying with the policy at the inception of the process, those who have the tendency to violate have room to negotiate to avoid penalty towards the end of the policy deadline. The analysis suggests that executive compensation regulators should pay more attention to the implementation of corporate governance mechanisms. In particular, regulators can play a key role in preventing the board from allowing the management far too much flexibility in policy compliance. This should enhance not only the effectiveness of the policy, but also the disciplinary function of the corporate governance mechanism in general. Investors can also use the compliance of minimum shareholding policy and the penalty of policy violation as a way of understanding the true level of board independence. This should assist investors in analysing their company's corporate governance quality.
| Identifer | oai:union.ndltd.org:bl.uk/oai:ethos.bl.uk:664974 |
| Date | January 2014 |
| Creators | Liu, Xicheng |
| Publisher | University of Bristol |
| Source Sets | Ethos UK |
| Detected Language | English |
| Type | Electronic Thesis or Dissertation |
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