Chapter 9 Flashcards
What is executive equity ownership?
executives who hold considerable personal wealth will be more ethical if they have a stake in the organization
-discourages self-interest behaviour
Equity ownership and firm performance
- modest research shows that equity ownership is related to higher market valuation
Target ownership plans
this is when executives are required to hold a minimum of stock
retention approach: x amount of stocks are vested
fixed number of shares
multiple annual compensation
what is the relationship between equity ownership and risk taking?
risk taking is influenced by potential payoff
direct stock holding: one for one stock profit and executive is motivated to grow
stock options grants (encourages risk taking): non-linear movement of value and increases volatility. Make more risky decision
Standard Litmus Test
the test that distinguishes risk from acceptable risk given the risk profile of the firm
What is accounting manipulation?
inflate stock prices to achieve bonus targets
- this is possible when executives hold a considerable amount of stocks in the company
Diversification of equity of executives
selling shares
hedging a porition
pledging a portion
What is Hedging?
hedging is offsetting risk by adverse movement of price
and
hedging follows a period in which stock price has run up and precedes periods of underperformance
Positive of Hedging
- diversification without immediate sale
- tax advantageous
- minimize public scrutiny
Negative of Hedging
unwinds equity incentive to perform
more costly to the company
difficult to explain to shareholders
Pledging
an executive pledge shares as collateral for a loan that proceeds of which are used to purchase additional assets
positive of pledging
diversification
tax advantageous
low interest rate
negative of pledging
changes incentive structure imposed on management
Who is an insider?
anyone part of the executive team, employee advisor, family connected to executives who has access to information about the company that’s not accessible to the public
insiders always have information trading advantage
What is the blackout window?
50 calender days prior or after information of earnings, new product, acquisition is released to the public where trading is illegal
