Workshop Series: Jordan Neyland
To empirically test the impact of CEOs' outside wealth on their compensation, I use spousal divorce as a proxy for a negative shock to a CEO's outside wealth. I predict that this shock decreases a CEOs' risk tolerance and that the board of directors adjusts the CEOs' compensation incentives in response to the change in incentives. I find that cash bonuses, restricted stock grants, and option grants increase following CEO divorce, suggesting boards react to changes in CEOs' outside wealth and risk incentives. I also find lower equity risk, idiosyncratic risk, and cash flow risk during the year of a CEO's divorce, consistent with lower risk tolerance. I find no support for alternative explanations of the observed compensation increases:
- There is no evidence that CEOs delay compensation to the years following divorce.
- CEOs do not reduce risk from being "distracted" by the divorce.
- Higher compensation following divorce is not driven by selection bias.
In addition, the results are not driven by firm governance, CEO effort, or other variables related to probability of divorce. Overall, the results on compensation support a risk-based interpretation of higher compensation following CEO divorce.
Senior Lecturer Jordan Neyland joined the Faculty of Business and Economics at the University of Melbourne in 2011 after receiving a PhD in finance from the Eller College at the University of Arizona. He holds a JD from the University of Houston Law Center and a BA in Economics from the University of Texas. His work focuses on the corporate acquisitions and governance. His current research interests include the impact of advisers on corporate acquisitions, the impact of litigation on publicly traded companies, and executive compensation.