Workshop Series: David Yermack
Many commentators have urged companies to pay top executives with deferred compensation, a type of incentive known as inside debt. Recent SEC disclosure reforms greatly increased the transparency of deferred compensation. We investigate stockholder and bondholder reactions to companies' initial reports of their CEOs' inside debt positions in early 2007 when new disclosure rules took effect. We find that bond prices rise, equity prices fall, and the volatility of both securities drops upon disclosures by firms whose CEOs have sizeable defined benefit pensions or deferred compensation. Similar changes in value occur for credit default swap spreads and exchange traded options. The results indicate a reduction in firm risk, a transfer of value from equity toward debt, and an overall destruction of enterprise value when a CEO's deferred compensation holdings are large.
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David Yermack is the Albert Fingerhut Professor of Finance and Business Transformation at New York University's Stern School of Business, where he has been a member of the finance department faculty since completing his doctoral studies in 1994. He is also an Adjunct Professor of Law at the New York University School of Law and a Visiting Scholar at the Federal Reserve Bank of New York. He teaches the popular joint MBA-JD course, Restructuring Firms and Industries, as well as doctoral level courses on corporate governance and executive compensation. Professor Yermack has published more than 20 papers in peer reviewed academic journals, including some of the most cited papers to date in the fields of executive compensation and corporate governance. His most widely known research include studies of board of directors size, compensation, and appointments; aspects of CEO compensation including corporate jet use, severance packages, and especially stock options; and research into firms' capital structure design. He is the author of the landmark study, "Good Timing: CEO Stock Option Awards and Company News Announcements," Journal of Finance (1997). That paper led to exposure of the recent stock option backdating scandal involving more than 200 companies and numerous government prosecutions, both civil and criminal. Professor Yermack holds AB (1995), MBA (1991), JD (1991), AM (1993) and PhD (1994) degrees, all from Harvard University. He is on the editorial boards of four leading finance journals and was elected in 2008 as an academic member of the board of directors of the Financial Management Association. He has been a visiting faculty member as 12 universities and given invited research seminars at more than 80 universities worldwide.