CEO stock-based pay, home-country risk, and foreign firms' capital acquisition in the US market

Mason A. Carpenter, Daniel C. Indro, Stewart R. Miller, Malika Richards

Research output: Contribution to journalArticle

9 Citations (Scopus)

Abstract

Manuscript Type: EmpiricalResearch Question/Issue: We ask two research questions: (1) How do CEO stock ownership and options influence the amount of equity capital that a foreign firm raises in US capital markets? (2) How does the foreign firm's home-country risk moderate these relationships? Research Findings/Insights: To test our hypotheses, we use a sample of firms from 40 countries that raised equity capital via ADR offerings between 1994 and 2005. Using a full-information maximum likelihood approach to estimate a model that accounts for sample selection associated with non-capital raising ADRs and non-listed ADRs, as well as hot and cold equity markets, we found that CEO stock and option ownership lead to a higher level of equity capital raised. Interestingly, the level of home-country risk of the issuing firm weakens the relationship between the CEO stock ownership and the amount of equity capital raised, but strengthens the relationship between CEO stock options and ADR equity capital raised. Theoretical/Academic Implications: We develop a framework that draws on behavioral decision making and agency theory to suggest that executive risk taking varies across countries and different forms of monitoring (stock ownership versus options) and that agents may exhibit risk-seeking as well as risk-averse behaviors. We also examined the potential corporate governance costs associated with principal-principal conflict as it relates to CEO stock-based compensation and the implications for raising equity capital. Because stock ownership and stock options have different risk profiles, and foreign firms operate in countries with different home-country risk, we theorize how home-country risk will moderate the relationship between CEO stock ownership or options with the amount of equity capital raised by a foreign firm in US stock markets through the issuance of American Depository Receipts (ADRs). Practitioner/Policy Implications: Our results show that US investors pay attention to the types of stock-based executive compensation used by firms that raise capital in the US. In particular, CEOs of firms from higher risk countries need to consider US investors' perceptions of their stock-based compensation because it may hamper the firm's effectiveness in raising capital in the US.

Original languageEnglish (US)
Pages (from-to)496-510
Number of pages15
JournalCorporate Governance: An International Review
Volume18
Issue number6
DOIs
StatePublished - Jan 1 2010

Fingerprint

Country risk
Home country
Equity capital
Foreign firms
Chief executive officer
Ownership
American depository receipts
Maximum likelihood
Decision making
Monitoring
Compensation and Redress
Costs
Stock-based compensation
Stock options
Investors
Financial markets
Corporate governance
Risk-averse
Capital markets
Risk seeking

All Science Journal Classification (ASJC) codes

  • Business, Management and Accounting(all)
  • Strategy and Management
  • Management of Technology and Innovation

Cite this

@article{5d3465fbec234e8485d8881cb84b69c9,
title = "CEO stock-based pay, home-country risk, and foreign firms' capital acquisition in the US market",
abstract = "Manuscript Type: EmpiricalResearch Question/Issue: We ask two research questions: (1) How do CEO stock ownership and options influence the amount of equity capital that a foreign firm raises in US capital markets? (2) How does the foreign firm's home-country risk moderate these relationships? Research Findings/Insights: To test our hypotheses, we use a sample of firms from 40 countries that raised equity capital via ADR offerings between 1994 and 2005. Using a full-information maximum likelihood approach to estimate a model that accounts for sample selection associated with non-capital raising ADRs and non-listed ADRs, as well as hot and cold equity markets, we found that CEO stock and option ownership lead to a higher level of equity capital raised. Interestingly, the level of home-country risk of the issuing firm weakens the relationship between the CEO stock ownership and the amount of equity capital raised, but strengthens the relationship between CEO stock options and ADR equity capital raised. Theoretical/Academic Implications: We develop a framework that draws on behavioral decision making and agency theory to suggest that executive risk taking varies across countries and different forms of monitoring (stock ownership versus options) and that agents may exhibit risk-seeking as well as risk-averse behaviors. We also examined the potential corporate governance costs associated with principal-principal conflict as it relates to CEO stock-based compensation and the implications for raising equity capital. Because stock ownership and stock options have different risk profiles, and foreign firms operate in countries with different home-country risk, we theorize how home-country risk will moderate the relationship between CEO stock ownership or options with the amount of equity capital raised by a foreign firm in US stock markets through the issuance of American Depository Receipts (ADRs). Practitioner/Policy Implications: Our results show that US investors pay attention to the types of stock-based executive compensation used by firms that raise capital in the US. In particular, CEOs of firms from higher risk countries need to consider US investors' perceptions of their stock-based compensation because it may hamper the firm's effectiveness in raising capital in the US.",
author = "Carpenter, {Mason A.} and Indro, {Daniel C.} and Miller, {Stewart R.} and Malika Richards",
year = "2010",
month = "1",
day = "1",
doi = "10.1111/j.1467-8683.2010.00817.x",
language = "English (US)",
volume = "18",
pages = "496--510",
journal = "Corporate Governance (Oxford)",
issn = "0964-8410",
publisher = "Wiley-Blackwell",
number = "6",

}

CEO stock-based pay, home-country risk, and foreign firms' capital acquisition in the US market. / Carpenter, Mason A.; Indro, Daniel C.; Miller, Stewart R.; Richards, Malika.

In: Corporate Governance: An International Review, Vol. 18, No. 6, 01.01.2010, p. 496-510.

Research output: Contribution to journalArticle

TY - JOUR

T1 - CEO stock-based pay, home-country risk, and foreign firms' capital acquisition in the US market

AU - Carpenter, Mason A.

AU - Indro, Daniel C.

AU - Miller, Stewart R.

AU - Richards, Malika

PY - 2010/1/1

Y1 - 2010/1/1

N2 - Manuscript Type: EmpiricalResearch Question/Issue: We ask two research questions: (1) How do CEO stock ownership and options influence the amount of equity capital that a foreign firm raises in US capital markets? (2) How does the foreign firm's home-country risk moderate these relationships? Research Findings/Insights: To test our hypotheses, we use a sample of firms from 40 countries that raised equity capital via ADR offerings between 1994 and 2005. Using a full-information maximum likelihood approach to estimate a model that accounts for sample selection associated with non-capital raising ADRs and non-listed ADRs, as well as hot and cold equity markets, we found that CEO stock and option ownership lead to a higher level of equity capital raised. Interestingly, the level of home-country risk of the issuing firm weakens the relationship between the CEO stock ownership and the amount of equity capital raised, but strengthens the relationship between CEO stock options and ADR equity capital raised. Theoretical/Academic Implications: We develop a framework that draws on behavioral decision making and agency theory to suggest that executive risk taking varies across countries and different forms of monitoring (stock ownership versus options) and that agents may exhibit risk-seeking as well as risk-averse behaviors. We also examined the potential corporate governance costs associated with principal-principal conflict as it relates to CEO stock-based compensation and the implications for raising equity capital. Because stock ownership and stock options have different risk profiles, and foreign firms operate in countries with different home-country risk, we theorize how home-country risk will moderate the relationship between CEO stock ownership or options with the amount of equity capital raised by a foreign firm in US stock markets through the issuance of American Depository Receipts (ADRs). Practitioner/Policy Implications: Our results show that US investors pay attention to the types of stock-based executive compensation used by firms that raise capital in the US. In particular, CEOs of firms from higher risk countries need to consider US investors' perceptions of their stock-based compensation because it may hamper the firm's effectiveness in raising capital in the US.

AB - Manuscript Type: EmpiricalResearch Question/Issue: We ask two research questions: (1) How do CEO stock ownership and options influence the amount of equity capital that a foreign firm raises in US capital markets? (2) How does the foreign firm's home-country risk moderate these relationships? Research Findings/Insights: To test our hypotheses, we use a sample of firms from 40 countries that raised equity capital via ADR offerings between 1994 and 2005. Using a full-information maximum likelihood approach to estimate a model that accounts for sample selection associated with non-capital raising ADRs and non-listed ADRs, as well as hot and cold equity markets, we found that CEO stock and option ownership lead to a higher level of equity capital raised. Interestingly, the level of home-country risk of the issuing firm weakens the relationship between the CEO stock ownership and the amount of equity capital raised, but strengthens the relationship between CEO stock options and ADR equity capital raised. Theoretical/Academic Implications: We develop a framework that draws on behavioral decision making and agency theory to suggest that executive risk taking varies across countries and different forms of monitoring (stock ownership versus options) and that agents may exhibit risk-seeking as well as risk-averse behaviors. We also examined the potential corporate governance costs associated with principal-principal conflict as it relates to CEO stock-based compensation and the implications for raising equity capital. Because stock ownership and stock options have different risk profiles, and foreign firms operate in countries with different home-country risk, we theorize how home-country risk will moderate the relationship between CEO stock ownership or options with the amount of equity capital raised by a foreign firm in US stock markets through the issuance of American Depository Receipts (ADRs). Practitioner/Policy Implications: Our results show that US investors pay attention to the types of stock-based executive compensation used by firms that raise capital in the US. In particular, CEOs of firms from higher risk countries need to consider US investors' perceptions of their stock-based compensation because it may hamper the firm's effectiveness in raising capital in the US.

UR - http://www.scopus.com/inward/record.url?scp=78049418286&partnerID=8YFLogxK

UR - http://www.scopus.com/inward/citedby.url?scp=78049418286&partnerID=8YFLogxK

U2 - 10.1111/j.1467-8683.2010.00817.x

DO - 10.1111/j.1467-8683.2010.00817.x

M3 - Article

AN - SCOPUS:78049418286

VL - 18

SP - 496

EP - 510

JO - Corporate Governance (Oxford)

JF - Corporate Governance (Oxford)

SN - 0964-8410

IS - 6

ER -