Hostname: page-component-5d59c44645-zlj4b Total loading time: 0 Render date: 2024-02-21T13:23:49.569Z Has data issue: false hasContentIssue false

Quid-pro-quo exchanges of outside director defined benefit pension plans for equity-based compensation

Published online by Cambridge University Press:  11 May 2006

CYNTHIA J. CAMPBELL
Affiliation:
Department of Finance, Iowa State University, 2330 Gerdin Business Building, Ames, IA, 50011, United States
MARK L. POWER
Affiliation:
Department of Finance, Iowa State University, 2330 Gerdin Business Building, Ames, IA, 50011, United States
ROGER D. STOVER
Affiliation:
Department of Finance, Iowa State University, 2330 Gerdin Business Building, Ames, IA, 50011, United States

Abstract

The independence of outside directors is critical to corporate board effectiveness. We examine a unique period in corporate governance when outside directors' defined benefit pensions are replaced with increases in equity. Firms with pension plans significantly underperform their industry in terms of stock returns. Firms terminating the pension plans in exchange for equity have significant increases in stock returns relative to their industry subsequent to the change. All samples outperform the ROA and ROE industry medians both before and after the change in compensation, indicating pressure from organized investors likely comes from stock performance, not accounting performance. Investor rights pressure and outside director compensation and not takeover risk or institutional ownership best explain firms altering outside director compensation, with board of director effectiveness improving.

Type
Research Article
Copyright
2006 Cambridge University Press

Access options

Get access to the full version of this content by using one of the access options below. (Log in options will check for institutional or personal access. Content may require purchase if you do not have access.)

Footnotes

The authors are associated with the College of Business, Iowa State University. Helpful comments and suggestions provided at the University of Delaware, University of Hawai'i at Manoa, Iowa State University, University of Missouri at Columbia and Wayne State University seminars are appreciated as well as those of Sridhar Sundaram at the Financial Management Association meetings and Stuart Gillan. The research assistance of Brad Bauer, Martin Joseph Bouska, Ryan Carstenson, Anders L. C. Sand and Yingke Zhao are gratefully acknowledged. This research was completed while Cynthia J. Campbell was on an Iowa State University Faculty Development Grant at the Asia-Pacific Financial Markets (FIMA) Research Center, University of Hawai'i at Manoa as a FIMA Visiting Professor. We wish to thank Mike Orszag and the anonymous referees for their helpful comments and suggestions.