Premium
CEO Replacement and Compensation Around Dividend Omissions
Author(s) -
Fosberg Richard
Publication year - 2001
Publication title -
corporate governance: an international review
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.866
H-Index - 85
eISSN - 1467-8683
pISSN - 0964-8410
DOI - 10.1111/1467-8683.00223
Subject(s) - dividend , executive compensation , shareholder , principal–agent problem , business , earnings , compensation (psychology) , dividend payout ratio , agency cost , accounting , dividend policy , monetary economics , sample (material) , stock (firearms) , economics , corporate governance , finance , psychology , mechanical engineering , chemistry , chromatography , psychoanalysis , engineering
Agency theory suggests that to motivate a firm’s managers to act in the best interests of the firm’s shareholders, managerial compensation should be directly tied to firm performance. In this study, the measure of firm performance used to test this theory is the decision by a firm to omit its common stock dividend. A dividend omission is taken to indicate that the firm’s management and board of directors believe that the current and future earnings prospects (performance) of the firm are poor. In a sample of firms that omitted their dividend sometime during the years 1987 through 1992, we find that, on average, the CEOs (Chief Executive Officers) of these firms experienced significant decreases in total compensation (wealth) around the time of the dividend omission. Not surprisingly, the CEOs who experienced the greatest compensation loss were the 61.4% of CEOs who lost their jobs. The probability that a CEO would be replaced around the time of the dividend omission was found to be directly related to the CEO’s age and inversely related to the firm’s performance and CEO share ownership.