CEO Stock‐Based Pay, Home‐Country Risk, and Foreign Firms' Capital Acquisition in the US Market

• Author: Stewart R. Miller,Mason A. Carpenter,Daniel C. Indro,Malika Richards
• Date: 01 November 2010
• Published date: 01 November 2010
• DOI: http://doi.org/10.1111/j.1467-8683.2010.00817.x

CEO Stock-Based Pay, Home-Country Risk,

and Foreign Firms’ Capital Acquisition in the

US Marketcorg_817496..510

Mason A. Carpenter, Daniel C. Indro, Stewart R. Miller* and

Malika Richards

ABSTRACT

Manuscript Type: Empirical

Research 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 capitalmarkets? (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-capitalraising 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.

Keywords: Corporate Governance, CEO Stock-Based Compensation, Home-Country Risk, Equity Offering, American

Depository Receipts

The implications of executive compensation for f‌irm per-

formance and other critical f‌irm outcomes are of inter-

est to researchers in many business domains, and to

management scientists in particular (e.g., Cordiero, Veliyath,

& Romal, 2007; Devers, Cannella, Reilly, & Yoder, 2007).

While initially based on the tenets of agency theory (Jensen

& Meckling, 1976; Jensen & Murphy, 1990), management

research has drawn insight frombehavioral decision making

theory to provide a clearer understanding about the roles of

different forms of pay, particularly stock-based pay. Increas-

ingly referred to as behavioral agency theory, such manage-

ment research on executive compensation has begun to ask

*Address for correspondence: The University of Texas – San Antonio, SanAntonio,

TX 78249-1644, USA. Tel: 210-458-6868; Fax: 210-458-5783; E-mail: stewart.miller@

utsa.edu

496

Corporate Governance: An International Review, 2010, 18(6): 496–510

© 2010 Blackwell Publishing Ltd

doi:10.1111/j.1467-8683.2010.00817.x