Pay for Performance
Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts
Jesse Edgerton
Journal of Finance, forthcoming
Abstract:
This paper uses novel data to examine the fleets of corporate jets operated by both publicly traded and privately held firms. In the cross-section, firms owned by private equity funds average 40% smaller fleets than observably similar public firms. Similar fleet reductions are observed within firms that undergo leveraged buyouts. Quantile regressions indicate that these results are driven by firms in the upper 30% of the conditional jet distribution. Results thus suggest that executives in a substantial minority of public firms enjoy excessive perquisite and compensation packages.
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Uneasy Lies the Head That Wears the Crown: The Link Between Guilt Proneness and Leadership
Rebecca Schaumberg & Francis Flynn
Journal of Personality and Social Psychology, forthcoming
Abstract:
We propose that guilt proneness is a critical characteristic of leaders and find support for this hypothesis across 3 studies. Participants in the first study rated a set of guilt-prone behaviors as more indicative of leadership potential than a set of less guilt-prone behaviors. In a follow-up study, guilt-prone participants in a leaderless group task engaged in more leadership behaviors than did less guilt-prone participants. In a third, and final, study, we move to the field and analyze 360° feedback from a group of young managers working in a range of industries. The results indicate that highly guilt-prone individuals were rated as more capable leaders than less guilt-prone individuals and that a sense of responsibility for others underlies the positive relationship between guilt proneness and leadership evaluations.
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David Yermack
NBER Working Paper, March 2012
Abstract:
This paper shows close connections between CEOs' vacation schedules and corporate news disclosures. I identify vacations by merging corporate jet flight histories with real estate records of CEOs' property owned near leisure destinations. Companies disclose favorable news just before CEOs leave for vacation and delay subsequent announcements until CEOs return, releasing news at an unusually high rate on the CEO's first day back. When CEOs are away, companies announce less news than usual and stock prices exhibit sharply lower volatility. Volatility increases immediately when CEOs return to work. CEOs spend fewer days out of the office when their ownership is high and when the weather at their vacation homes is cold or rainy.
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Are Overconfident CEOs Better Innovators?
David Hirshleifer, Angie Low & Siew Hong Teoh
Journal of Finance, forthcoming
Abstract:
Previous empirical work on adverse consequences of CEO overconfidence raises the question of why firms hire overconfident managers. Theoretical research suggests a reason, that overconfidence can benefit shareholders by increasing investment in risky projects. Using options- and press-based proxies for CEO overconfidence, we find that over the 1993 to 2003 period, firms with overconfident CEOs have greater return volatility, invest more in innovation, obtain more patents and patent citations, and achieve greater innovative success for given research and development expenditure. Overconfident managers only achieve greater innovation in innovative industries. Our findings suggest that overconfidence help CEOs exploit innovative growth opportunities.
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Do Private Equity Managers Earn Their Fees? Compensation, Ownership, and Cash Flow Performance
David Robinson & Berk Sensoy
NBER Working Paper, March 2012
Abstract:
We study the relation between compensation practices, incentives, and performance in private equity using new data that connect ownership structures, management contracts, and quarterly cash flows for a large sample of buyout and venture capital funds from 1984-2010. Although many critics of private equity argue that PE firms earn excessive compensation and have muted performance incentives, we find no evidence that higher compensation or lower managerial ownership are associated with worse net-of-fee performance, in stark contrast to other asset management settings. Instead, compensation is largely unrelated to net-of-fee cash flow performance. Nevertheless, market conditions during fundraising are an important driver of compensation, as pay rises and shifts to fixed components during fundraising booms. In addition, the behavior of distributions around contractual triggers for fees and carried interest is consistent with an underlying agency conflict between investors and general partners. Our evidence is most consistent with an equilibrium in which compensation terms reflect agency concerns and the productivity of manager skills, and in which managers with higher compensation earn back their pay by delivering higher gross performance.
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As Luck Would Have It: The Effect of the Vietnam Draft Lottery on Long-Term Career Outcomes
Douglas Frank
Industrial Relations, April 2012, Pages 247-274
Abstract:
Using an original data set matching individual birthdays to Vietnam War draft lottery numbers, I study how the random lottery number assignment affects representation in a sample of top corporate executives decades after the war's end. I find that men with lottery numbers placing them at risk of induction are underrepresented among top U.S. executives in the 1990s. In contrast, I find that high draft risk is positively correlated with indicators of human capital such as earnings and speed of reaching the executive ranks. If the executives are viewed as the winners of a multi-stage elimination tournament that selected on productivity, these results are consistent with the hypothesis that draft risk led to a mean-reducing spread in the productivity distribution of draft-eligible males.
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Winning by Losing: Evidence on the Long-Run Effects of Mergers
Ulrike Malmendier, Enrico Moretti & Florian Peters
NBER Working Paper, April 2012
Abstract:
Do acquirors profit from acquisitions, or do acquiring CEOs overbid and destroy shareholder value? We present a novel approach to estimating the long-run abnormal returns to mergers exploiting detailed data on merger contests. In the sample of close bidding contests, we use the loser's post-merger performance to construct the counterfactual performance of the winner had he not won the contest. We find that bidder returns are closely aligned in the years before the contest, but diverge afterwards: Winners underperform losers by 50 percent over the following three years. Existing methodologies, including announcement effects, fail to capture the acquirors' underperformance.
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The Star Wars Arms Race in College Athletics: Coaches' Pay and Athletic Program Status
William Tsitsos & Howard Nixon
Journal of Sport and Social Issues, February 2012, Pages 68-88
Abstract:
This study focuses on a "star wars arms race" concerning escalating head coaches' salaries in the biggest of the big-time college sports in the United States, football and men's basketball. Data are presented from six seasons since 2003 testing the assumption that paying top salaries to coaches assures or improves success on the field and in the rankings. The data concerning rankings and mobility into and out of the "Top 25" for teams with the top-paid football and men's basketball coaches show that institutions paying the highest salaries to head coaches of these sports are not assured of having highly ranked teams. Policy issues and implications of the star wars arms race for college sports and higher education institutions are discussed.
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Learning, Imitation, and the Use of Knowledge: A Comparison of Markets, Hierarchies, and Teams
John Butler & Jovan Grahovac
Organization Science, forthcoming
Abstract:
We use computer simulation to study how different allocations of decision rights give rise to different organizational abilities to maintain and act upon accurate maps of a changing environment. We compare the performance of three archetypal organizational forms as we vary the dynamism and complexity of the environment and the rates at which individuals can observe the environment and imitate each other. We find that teams in which actions are based on plurality votes excel when the task is relatively easy - that is, the ability of individual members to observe the environment is high compared to the environment's dynamism and size. Markets in which all agents act independently perform well when the task is difficult and the agents can easily imitate each other. Hierarchies in which agents in the upper echelons impose actions on their subordinates outperform the other two forms when the agents' abilities to observe the environment are heterogeneous, the task is difficult, and imitation among the agents is moderate. The analysis has implications for the relationship between centralization and the notions of exploitation and exploration in March's influential work [March JG (1991) Exploration and exploitation in organizational learning. Organ. Sci.
2(1):71-87].
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The Market for Financial Advice: An Audit Study
Sendhil Mullainathan, Markus Noeth & Antoinette Schoar
NBER Working Paper, March 2012
Abstract:
Do financial advisers undo or reinforce the behavioral biases and misconceptions of their clients? We use an audit methodology where trained auditors meet with financial advisers and present different types of portfolios. These portfolios reflect either biases that are in line with the financial interests of the advisers (e.g., returns-chasing portfolio) or run counter to their interests (e.g., a portfolio with company stock or very low-fee index funds). We document that advisers fail to de-bias their clients and often reinforce biases that are in their interests. Advisers encourage returns-chasing behavior and push for actively managed funds that have higher fees, even if the client starts with a well-diversified, low-fee portfolio.
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What I See, What I Do: How Executive Hubris Affects Firm Innovation
Yi Tang, Jiatao Li & Hongyan Yang
Journal of Management, forthcoming
Abstract:
This study explores the potential benefits of executive hubris to firm innovation. Grounded in the upper echelons theory and the firm innovation literature, hypotheses were developed and tested in two studies with different contexts and methods. Study 1 uses a set of cross-sectional survey data on a large sample of Chinese CEOs in manufacturing industries. Study 2 uses a set of longitudinal archival data on U.S. public firms in high-tech industries. Both studies render robust support to the authors' main theoretical prediction - that executive hubris is positively related to firm innovation. The authors further found that the main effect varies under certain environmental conditions: The relationship between executive hubris and firm innovation becomes weaker when the environment is more munificent and complex.
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Jan Ketil Arnulf, John Erik Mathisen & Thorvald Hærem
Leadership, May 2012, Pages 169-185
Abstract:
Similar to practices in top management positions worldwide, there has been an increasing tendency in recent decades to fire football managers when the team does not perform to the stakeholders' expectations. Previous research has suggested that improvements after change of manager are a statistical artefact. Based on 12 years of data from the Norwegian Premier League, we conduct a natural experiment showing what would have taken place if the manager had not been fired. In this case, the performance might have improved just as well and even quicker. Building on theories in expertise and decision making, we explore the data and argue that decision makers may be fooled by randomness and learn wrong lessons about team leadership. Our analyses support a post-heroic view of team leadership as an emergent, output variable. Exaggerated focus on the individual manager may ruin long-term performance. Practical implications are discussed.
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Management Quality and Antitakeover Provisions
Thomas Chemmanur, Imants Paeglis & Karen Simonyan
Journal of Law and Economics, August 2011, Pages 651-692
Abstract:
We present the first empirical analysis of the relationship between a firm's management quality and the prevalence of antitakeover provisions in its corporate charter and their influence on initial public offering (IPO) valuation and post-IPO performance. We test the implications of the managerial entrenchment hypothesis, which implies that antitakeover provisions serve only to enhance the control benefits of incumbent management, and the long-term value creation hypothesis, which implies that such provisions can enhance value in the hands of higher quality management. We find that, first, firms with higher quality management and greater growth options are associated with a greater number of antitakeover provisions. Second, firms with higher management quality and a greater number of antitakeover provisions outperform other firms in the sample in terms of post-IPO operating and stock return performance and obtain higher IPO valuations. Our findings reject the managerial entrenchment hypothesis and support the long-term value creation hypothesis.
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Are company founders underpaid?
Konstantinos Tzioumis
Applied Economics, Spring 2012, Pages 2527-2536
Abstract:
This article examines the relation between founder status and CEO compensation in publicly listed US firms. The results suggest that CEO/founders receive lower cash pay and total compensation compared to professional managers. In contrast, CEOs who are relatives of the founders receive similar cash pay and total compensation to that of professional managers. Different compensation levels also emerge in terms of stock option awards. The findings underline the importance of distinguishing among these three CEO types when examining the determinants of executive compensation.
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Does it cost to be sustainable?
Jacquelyn Humphrey, Darren Lee & Yaokan Shen
Journal of Corporate Finance, June 2012, Pages 626-639
Abstract:
We investigate whether firms' corporate social performance (CSP) ratings impact their performance (cost of capital) and risk. Using a proprietary CSP ratings database, we find no difference in the risk-adjusted performance of UK firms with high and low CSP ratings. Additionally, the firms do not differ in their amount of idiosyncratic risk. We find some evidence of high-ranked firms being larger. The empirical evidence therefore indicates that investors and managers are able to implement a CSP investment or business strategy without incurring any significant financial cost (or benefit) in terms of risk or return.
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Michael Barnett & Robert Salomon
Strategic Management Journal, forthcoming
Abstract:
Building on the theoretical argument that a firm's ability to profit from social responsibility depends upon its stakeholder influence capacity (SIC), we bring together contrasting literatures on the relationship between corporate social performance (CSP) and corporate financial performance (CFP) to hypothesize that the CSP-CFP relationship is U-shaped. Our results support this hypothesis. We find that firms with low CSP have higher CFP than firms with moderate CSP, but firms with high CSP have the highest CFP. This supports the theoretical argument that SIC underlies the ability to transform social responsibility into profit.
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Iain Clacher & Jens Hagendorff
Journal of Business Ethics, March 2012, Pages 253-266
Abstract:
This paper investigates the stock market reaction to the announcement that a firm has been included in the UK FTSE4Good index of socially responsible firms. We use the announcement of firm inclusion in the index to estimate the stock market reaction to a firm being classified as socially responsible. This is an important test of whether investors view the undertaking of socially responsible activities by firms as a value increasing or value decreasing initiative by management. We do not find strong evidence in favour of a positive market reaction. However, there is a large cross-sectional variation in the market reaction to this announcement. Investors appear to be reacting to this event and there are a number of firm characteristics that are well-established proxies for CSR that can explain the market reaction.
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Executive Compensation and the Role for Corporate Governance Regulation
David Dicks
Review of Financial Studies, forthcoming
Abstract:
This article establishes a role for corporate governance regulation. An externality operating through executive compensation motivates regulation. Governance lowers agency costs, allowing firms to grant less incentive pay. When a firm increases governance and lowers incentive pay, other firms can also lower executive compensation. Because firms do not internalize the full benefit of governance, regulation can improve investor welfare. When regulation is enforced, large firms increase in value, small firms decrease in value, and all firms lower incentive pay. Distinct cross-sectional and cross-country predictions for the number of voluntary governance firms are provided.
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The Mystery of Zero-Leverage Firms
Ilya Strebulaev & Baozhong Yang
NBER Working Paper, March 2012
Abstract:
This paper documents the puzzling evidence that a substantial number of large public non-financial US firms follow a zero-debt policy. Over the 1962-2009 period, on average 10.2% of such firms have zero debt and almost 22% have less than 5% book leverage ratio. Neither industry nor size can account for such puzzling behavior. Zero-leverage behavior is a persistent phenomenon, with 30% of zero-debt firms refrain from debt for at least five consecutive years. Particularly surprising is the presence of a large number of zero-leverage firms who pay dividends. They are more profitable, pay higher taxes, issue less equity, and have higher cash balances than their proxies chosen by industry and size. These firms also pay substantially higher dividends than their proxies and thus their total payout ratio is virtually independent of leverage. Firms with higher CEO ownership and longer CEO tenure are more likely to follow a zero-leverage policy, especially if boards are smaller and less independent. Family firms are also more likely to be zero-levered. Our results suggest that managerial and governance characteristics are related to the zero-leverage phenomena in an important way.