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Financial Services Industry

Corporate Governance and Firm Diversification

Financial Management (Financial Management Association), Spring, 2000 by Ronald C. Anderson, Thomas W. Bates, John M. Bizjak, Michael L. Lemmon

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II. Sample and Data Description

The firms in our study are an augmented sample of Anderson and Bizjak's (1999) research on the relation between compensation committee structure and CEO pay. Anderson et al.'s original sample includes 50 firms in which the CEO served on the compensation committee during some portion of the sample period and 50 size and industry matched firms. We refine this sample by excluding four banks (primary SIC code 6021, 6022, and 6029) due to difficulties in calculating Berger and Ofek's (1995) value loss measure for financial firms. The sample is then augmented with 103 randomly selected non-financial firms. The final data set consists of 199 NYSE/AMEX firms covering the years 1985 through 1994 for a total of 1,851 firm-year observations with complete data. To avoid potential survivorship bias, firms are allowed to exit the panel at any time leaving a total of 158 firms in 1994. [3]

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For each year that a sample firm is in the panel, we gather data on CEO compensation and inside ownership. Information on board structure and the ownership of outside blockholders is collected for every other year beginning in 1985. in the intervening years board and blockholder data from the previous year are used. [4]

A. Compensation

This study incorporates four CEO compensation measures developed by Jensen and Murphy (1990), Crawford, Ezzell, and Miles (1995), and Mehran (1995). For the first measure, salary and bonus are aggregated into a single variable and defined as the fixed portion of total compensation. Our second compensation measure computes the annual value of the total option portfolio. This is calculated by adding 1) the value of each outstanding option grant held at year-end, 2) the value of any options awarded during the year, and 3) the profits associated with the exercise of any options during the year. Option values are estimated using the Black-Scholes (1973) model adjusted for continuously paid dividends. Third, aggregate annual CEO pay is measured as the sum of the three components of compensation: salary, bonus, and option value. Finally, we calculate a measure of equity-based pay, by taking the ratio of the value of the CEO's option portfolio to the sum of salary and bonus plus the value of the option portfolio. Co mpensation data is collected exclusively from proxy statements.

B. Ownership Structure

From corporate proxy statements, we gather information on CEO ownership, the ownership of all officers and directors (including the CEO), and identify all blockholders with at least a 5% equity stake in the firm. Blockholders are defined as affiliated or unaffiliated where an unaffiliated blockholder is defined as an entity that has no relationship with the firm beyond ownership. Shome and Singh (1995) find that the market reacts positively to the formation of outside blockholdings.

C. Board of Directors

Proxy statements are also used to collect data on the size and composition of the board of directors. Composition is established using a director classification scheme similar to the taxonomy used in Weisbach (1988). Directors currently employed by the firm or retired, and their immediate families, are identified as insiders. Outside directors are identified as members whose only affiliation with the firm is their directorship. We employ a third "gray" classification to identify those members of the board with existing or potential business ties to the firm, but who are not full time employees. Examples of gray directors include consultants, lawyers, financiers, and investment bankers.

Financial Services Industry

Corporate Governance and Firm Diversification

Financial Management (Financial Management Association), Spring, 2000 by Ronald C. Anderson, Thomas W. Bates, John M. Bizjak, Michael L. Lemmon

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