The Adverse Consequences of Share-Based Pay in Risky Companies

Shareholders increasingly regard it as desirable to link director pay packages to the share price, in order to align directors’ incentives with those of the shareholders. The result of such remuneration packages is that directors’ wealth will become concentrated in one stock, giving them an undiversified portfolio of shares. The resulting need to diversify will encourage directors to exercise their share options, irrespective of their expectations about future stock price performance. This benefit to diversifying will be greater the riskier the stock. Consistent with this, this paper finds that only option exercises in relatively low risk companies are informed, and precede significantly negative abnormal returns over the following 2-month period. As a result, providing directors in riskier companies with share-based pay packages might not be effective in aligning their incentives with those of the shareholders.     

Strategic Corporate Social Responsibility and Value Creation among Large Firms: Lessons from the Spanish Experience

Can corporate social responsibility (CSR) be a source of good and a wellspring of innovation, competitive advantage and value creation for the firm? Although CEOs and government leaders insist in public that CSR projects create value for the firm, privately they admit that they do not know if CSR pays off. To address this question and drawing on experience for the Spanish context, we test one of the few efforts to model how the strategic management of CSR may contribute to improving firm profitability (Burke and Logsdon, 1996). To do this, we examine the impact of three strategic CSR variables – visibility, appropriability, and voluntarism – on value creation among large Spanish corporations. The conclusions from these findings suggest that managers need to understand how CSR is similar to and different from other traditional corporate market activities if they are to pursue value creation through CSR. We also suggest avenues for future research to explain how CSR may be integrated into firm processes to create resources (assets) and capabilities (routines) that may lead to competitive advantage and superior economic performance.