asymmetric benchmarking in compensation executives are rewarded for good luck but not penalized for bad abstract principal agent theory suggests that a manager should be paid relative to a benchmark that removes the effect of market or sector performance on the firm s own performance recently it has been argued that such indexation is not observed in the data because executives can set pay in their own interests that is they can enjoy pay for luck as well as pay for performance we first show that this argument is incomplete the positive expected return on stock markets reflects compensation for bearing systematic risk if executives pay is tied to market movements they can only expect to receive the market determined return for risk bearing this argument however assumes that executive pay is tied to bad luck as well as to good luck if executives can truly influence the setting of their pay they will seek to have their performance benchmarked only when it is in their interest namely when the benchmark has fallen using industry benchmarks we find significantly less pay for luck when luck is down in which case pay for luck would reduce compensation than when it is up these empirical results are robust to a variety of alternative hypotheses and robustness checks and they suggest that the average executive loses 25 45 less pay from bad luck than is gained from good luck

ownership structure and ceo compensation implications for the choice of foreign market entry modes drawing on agency theory corporate governance and international business literatures we develop arguments relating equity ownership structures and ceo compensation mix to a firm s choice of foreign market entry modes based on a sample of 432 foreign market entries by 118 non diversified firms in the us manufacturing sector between 1991 and 1998 our findings indicate that greater equity ownership by institutional shareholders and inside directors is positively associated with a preference for full control entry modes in addition our results suggest that ceos with a greater proportion of pay tied to firm long term performance are more inclined to choose full control entry modes over shared control modes

vintage technologies and skill constraints evidence from u s exports of new and used machines when countries import production machinery they must choose between new and used equipment this article looks at that choice in the presence of labor saving technical progress and complementarity between technologies and skills within the firm it develops a theoretical model of the market for used machines it then analyzes data on united states u s exports of metalworking machine tools by country of destination classifying machines according to their vintage and their technological characteristics the data show that the share of used equipment imported is higher if the importing country has a lower level of development as measured by income per capita econometric estimation of the determinants of this share shows that it also is higher the greater is the technological change embodied in the machine or the greater is the change in the skills required to run the machine efficiently these results indicate that technological factors and skill constraints may be as important as factor prices in determining the choice of technique in developing countries the policy recommendation emerging from this work avoid constraints on imports of used equipment is similar to that in the existing literature but the reasoning is different instead of emphasizing inappropriate capital labor ratios for low wage countries the results indicate that investment in advanced technologies is effective only if importing countries have the skills to use them

marriage and managers attitudes to risk marital status can both reflect and affect individual preferences we explore the impact of marriage on corporate chief executive officers ceos and find that firms run by single ceos exhibit higher stock return volatility pursue more aggressive investment policies and do not respond to changes in idiosyncratic risk these effects are weaker for older ceos our findings continue to hold when we use variation in divorce laws across states to instrument for ceo marital status which supports the hypothesis that marriage itself drives choices rather than it just reflecting innate heterogeneity in preferences we explore various potential explanations for why single ceos may be less risk averse data as supplemental material are available at http dx doi org 10 1287 mnsc 2014 1926 this paper was accepted by wei jiang finance

institutions infrastructure and economic growth abstract this paper develops a structural model of infrastructure and output growth that takes account of institutional and economic factors that mediate in the infrastructure gdp interactions cross country estimates of the model indicate that the contribution of infrastructure services to gdp is substantial and in general exceeds the cost of provision of those services the results also shed light on the factors that shape a country s response to its infrastructure needs and offer policy implications for facilitating the removal of infrastructure inadequacies

financial intermediation as a beliefs bridge between optimists and pessimists this paper proposes a new framework for understandingnancial intermediation in contrast to previous research we consider a setting in which intermediaries possess no inherent information processing or monitoring advantages instead in an economy with overly optimistic entrepreneurs who require funding from overly skeptical pessimistic investors we show that intermediaries can arise endogenously in such a setting only a rational intermediary will be su ciently optimistic tond it worthwhile to invest in a technology for screening entrepreneurs projects and yet be pessimistic enough to use this technology our framework produces implications consistent with heretofore unexplained stylized facts and a number of others which are as of yet untested

energy reform in central and eastern europe this paper describes the current energy situation in central and eastern europe cee energy consumption patterns and energy pricing policies in the region are discussed changes in energy demand in the cee countries during the last three years and the impact on emissions of atmospheric pollutants and sulphur deposition are analysed an overview of two sets of energy projections is presented the official projections are compared with the alternative ones which assume radical changes in energy consumption arising from economic restructuring finally the most important common elements of energy policies formulated by the governments of cee countries are discussed

contracting theory and accounting abstract this paper reviews agency theory and its application to accounting issues i discuss the formulation of models of incentive problems caused by moral hazard and adverse selection problems i review theoretical research on the role of performance measures in compensation contracts and i compare how information is aggregated for compensation purposes versus valuation purposes i also review the literature on communication including models where the revelation principle does not apply so that nontruthful reporting and earnings management can take place the paper also discusses capital allocation within firms including transfer pricing and cost allocation problems

energy efficiency barriers in commercial and industrial firms in ukraine an empirical analysis abstract improvement in energy efficiency is one of the main options to reduce energy demand and greenhouse gas emissions however large scale deployment of energy efficient technologies is constrained by several factors employing a survey of 509 industrial and commercial firms throughout ukraine and a generalized ordered logit model we quantified the economic behavioral and institutional barriers that may impede the deployment of energy efficient technologies our analysis shows that behavioral barriers resulted from lack of information knowledge and awareness are major impediments to the adoption of energy efficient technologies in ukraine and that financial barriers may further impede investments in these technologies especially for small firms this suggests that carefully targeted information provisions and energy audits will enhance ukrainian firms investments in energy efficient technologies to save energy consumption improve productivity and reduce carbon emissions from the productive sectors

firm size and the nature of innovation within industries the case of process and product r d the effect of firm size on the allocation of r d effort between process and product innovation is examined it is hypothesized that relative to product innovations process innovations are less saleable in disembodied form and spawn less growth this implies that the returns to process r d will depend more on the firm s output at the time it conducts its r d than the returns to product r d incorporating this distinction in a simple model the authors derive and test predictions about how the fraction of r d devoted to process innovation varies with firm size within industries

risks of corporate entrepreneurship autonomy and agency issues although research on corporate entrepreneurship ce has attracted increasing attention risks of ce are not well examined in this paper we examine direct and indirect agency risks associated with providing middle and operational managers with autonomy in the hopes of encouraging ce the key ideas behind our discussion involve two dilemmas of ce 1 to solve the risk averseness problem of middle and operational managers and unleash their entrepreneurial ideas top management needs to encourage autonomous behaviors which can also exacerbate a different type of agency problem opportunistic behaviors 2 although the generation of new ideas to explore new strategic directions and or opportunities is important the very newness of the ideas make them difficult to evaluate and thus the selection process may be perceived as unfair by some managers we propose that a stock options b passive monitoring and c perceived procedural justice would attenuate the negative side effects associated with ce such as opportunistic behaviors and perceived unfairness although research in ce often stresses autonomy of middle and operational managers for new idea generation as important examining the whole process in terms of idea generation selection and implementation with respect to potential risks will extend the ce literature

financial intermediary capital we propose a dynamic theory of financial intermediaries that are better able to collateralize claims than households that is have a collateralization advantage intermediaries require capital as they have to finance the additional amount that they can lend out of their own net worth the net worth of financial intermediaries and the corporate sector are both state variables affecting the spread between intermediated and direct finance and the dynamics of real economic activity such as investment and financing the accumulation of net worth of intermediaries is slow relative to that of the corporate sector the model is consistent with key stylized facts about macroeconomic downturns associated with a credit crunch namely their severity their protractedness and the fact that the severity of the credit crunch itself affects the severity and persistence of downturns the model captures the tentative and halting nature of recoveries from crises

the growth of executive pay this paper examines both empirically and theoretically the growth of us executive pay during the period 1993 2003 during this period pay has grown much beyond the increase that could be explained by changes in firm size performance and industry classification had the relationship of compensation to size performance and industry classification remained the same in 2003 as it was in 1993 mean compensation in 2003 would have been only about half of its actual size during the 1993 2003 period equity based compensation has increased considerably in both new economy and old economy firms but this growth has not been accompanied by a substitution effect i e a reduction in non equity compensation the aggregate compensation paid by public companies to their top five executives during the considered period added up to about 350 billion and the ratio of this aggregate top five compensation to the aggregate earnings of these firms increased from 5 per cent in 1993 5 to about 10 per cent in 2001 3 after presenting evidence about the growth of pay we discuss alternative explanations for it we examine how this growth could be explained under either the arm s length bargaining model of executive compensation or the managerial power model among other things we discuss the relevance of the parallel rise in market capitalizations and in the use of equity based compensation copyright 2005 oxford university press

credit default swaps and ceo compensation a long term perspective in this paper we examine whether the onset of credit default swaps cdss affects a firm s executive compensation the availability of cdss allows lenders to transfer credit risk but not control

technology adoption and the investment climate survey data for 7 000 firms in 28 countries in eastern europe and central asia are used to examine the correlates of technology adoption proxied by iso certification and web use complementary inputs such as skilled labor managerial capacity research and development finance and good infrastructure are shown to be important correlates of technology adoption the link between market incentives and technology adoption is more nuanced while stronger consumer pressure is significantly associated with technology adoption competitor pressure is not suggesting that in developing economies where many input markets are imperfect it is primarily firms with rents that are able to adopt new technology foreign owned firms exhibit significantly better technology adoption outcomes but privatized firms with domestic owners do not

has the cds market lowered the cost of corporate debt abstract many have claimed that credit default swaps cdss have lowered the cost of debt financing to firms by creating new hedging opportunities and information for investors this paper evaluates the impact that the onset of cds trading has on the spreads that underlying firms pay to raise funding in the corporate bond and syndicated loan markets employing a range of methodologies we fail to find evidence that the onset of cds trading lowers the cost of debt financing for the average borrower further we uncover economically significant adverse effects on risky and informationally opaque firms

the effect of long term performance plans on corporate sell off induced abnormal returns this study examines the association between long term performance plans and wealth effects accruing to stockholders of divesting firms at announcements of sell off proposals the results indicate that divesting companies with long term performance plans experience a more favorable stock market reaction at the announcement of sell off proposals relative to firms without long term performance plans the findings imply that long term performance plans serve as an effective mechanism to motivate managers to make better decisions substantial research has been undertaken on restructuring corporate assets liabilities and ownership of publicly traded corporations with regard to asset restructuring most of the literature analyzes mergers and tender offers but recently attention has been given to divesting activities divestiture is a modification of the firm s productive assets and comes in the form of sell offs or spin offs in sell offs the parent company sells part of its assets for cash assets or securities of the acquiring firm spin offs involve transfers of assets to a newly organized firm whose shares are distributed to stockholders of the parent firm or involve the distribution of shares of a subsidiary to the parent firm s shareholders while recent studies1 provide evidence that spin off announcements are associated with significant positive abnormal returns to parent firms around the day of the event the studies on voluntary sell offs report mixed results 2 these results raise questions about management s motivation to sell part of the firm s assets prior research assumes that corporate sell offs are activities consistent with stockholders interests however sell offs can be motivated by managerial selfinterest particularly when sell offs increase reported profits and hence management compensation recent articles in the financial press3 suggest that firms

information reliability and a theory of financial intermediation this paper is an analysis of when it will be beneficial for agents engaged in the production of information to form coalitions the model is cast in a financial market framework thus leading to an identification of conditions sufficient for the existence of financial intermediaries intermediation is shown to improve welfare if informational asymmetries are present and the information generated to rectify these asymmetries is potentially unreliable the usual appeal to transactions costs to explain intermediation is not needed

regulation and growth why some countries grow faster than others is one of the most important questions in economics solving this puzzle has the obvious appeal of improving the living standards for a significant proportion of the world population we go further towards answering this question by studying a major determinant of growth regulations governing business activity our results also have significant implications for policy they suggest that countries should put priority on reforming their business regulations when designing growth policies measures of institutions currently used in the growth literature indicate the extent of problems but not how to resolve them by contrast the indicators in the doing business database are directly linked to specific reforms for example the procedures to register a business or property can be cut by combining them at a one stop shop for businesses establishing a credit bureau or reducing mandated severance pay for workers will also improve performance on the business regulations index our findings imply that identifying and implementing such reforms can accelerate economic growth

paradigm changing vs paradigm deepening innovation how firm scope influences firm technological response to shocks we examine the direction of firms research efforts as they respond to the shock of a sharp increase in the price of a key input in terms of direction firms can respond to this shock with paradigm changing investments that develop technologies to use substitute inputs or with paradigm deepening investments that develop technologies to improve the utilization efficiency of the existing input we develop a framework that suggests that firms emphasis on paradigm changing versus paradigm deepening investments depends on the degree of input relatedness across their businesses we test our hypotheses by examining the responses of large manufacturing firms in the united states to the oil shock of the early 1980s our framework predicts and our results show that the more related a firm s businesses are the larger its investments into paradigm changing technologies are and the smaller its investments into paradigm deepening technologies in response to the oil shock are we identify the implications of these findings for technological evolution and diversification literatures

workers machines and economic growth this paper models technology adoption as replacing workers by machines which perform the same job in the production process the paper shows that such modelling of technology adoption affects significantly the analysis of economic growth this model can explain large and persistent international differences in output levels and growth rates caused by small differences in underlying parameters

accounting income stock price and managerial compensation abstract this paper employs an agency model where a manager has a two dimensional action choice to study how the information content of earnings affects the design of compensation contracts based on earnings and price price is modeled as an endogenous variable that reflects all available information including earnings two settings are contrasted in the first earnings and price reflect the same underlying information about firm value while in the second earnings reflect a subset of the information reflected in price it is shown that differences in information content substantially alter the characteristics of compensation contracts based on earnings and price

are incentive contracts rigged by powerful ceos we argue that some powerful ceos induce boards to shift the weight on performance measures toward the better performing measures thereby rigging incentive pay a simple model formalizes this intuition and gives an explicit structural form on the rigged incentive portion of ceo wage function using u s data we find support for the model s predictions rigging accounts for at least 10 of the compensation to performance sensitivity and it increases with ceo human capital and firm volatility moreover a firm with rigged incentive pay that is one standard deviation above the mean faces a subsequent decrease of 4 8 in firm value and 7 5 in operating return on assets

diversification strategy and r d intensity in multiproduct firms this study provides empirical evidence that choice of diversification strategy systematically affects r d intensity in large multiproduct firms research and development intensity in dominant busin

banks and loan sales marketing nonmarketable assets theories of financial intermediation predict that bank loans should not be marketable because of moral hazard problems banks will not conduct credit risk analysis or monitor borrowers if they are not at risk for failing to perform these services throughout most of history bank loans have not in fact been marketable yet by the end of the 1980 s the amount of commercial and industrial loan sales outstanding had grown to over 250 billion from trivial amounts at the beginning of the decade to explain the opening of this loan sales market we present a model of incentive compatible loan sales that allows for implicit contractual features between loan sellers and loan buyers we then test for the presence of these features using a sample of over 800 recent loan sales

on the use of instrumental variables in accounting research abstract instrumental variable iv methods are commonly used in accounting research e g earnings management corporate governance executive compensation and disclosure research when the regressor variables are endogenous while iv estimation is the standard textbook solution to mitigating endogeneity problems the appropriateness of iv methods in typical accounting research settings is not obvious drawing on recent advances in statistics and econometrics we identify conditions under which iv methods are preferred to ols estimates and propose a series of tests for research studies employing iv methods we illustrate these ideas by examining the relation between corporate disclosure and the cost of capital

on the welfare effects and political economy of competition enhancing policies we analyse the welfare effects of policies that intensify product market competition and the channels through which they operate using a circular model of horizontal product differentiation with asymmetric costs we study the effects of increased price competition on market selection among incumbent firms cost reduction effort and entry of new firms the model also generates an endogenous demand for competition enhancing or retarding policies arising from cost heterogeneity and we demonstrate the possibility of a low competition political economy trap simulations of the model illustrate that the selection effects we analyse which traditional cost benefit analysis is unlikely to capture can be large

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

executive stock options as mixed gambles revisiting the behavioral agency model conceiving of stock options as providing ceos with cues for the possibility of both greater prospective wealth and losses to current wealth we revisit predictions of the behavioral effects of equity based pay using the behavioral agency model bam we refine the bam s original formulation and provide an explanation for previous conflicting empirical results by theorizing that the anticipation of prospective wealth attenuates the negative effect of accumulated current equity wealth upon ceo strategic risk taking in doing so we offer an advancement of the dialectic between 1 classical agency scholars arguing that equity based pay leads to more risk taking and 2 behavioral scholars arguing that equity wealth creates risk bearing leading to less risk taking we also suggest that the influences of prospective wealth and current wealth on strategic risk taking depend on the extent to which agents can manage the risk inherent in their compensation package and agent vulnerability to losses formal hypotheses to test these expectations are made by focusing on equity based compensation our findings offer strong support for these theoretical expectations

solar power investment in north africa reducing perceived risks abstract climate protection targets for mid century imply a need to scale up european renewable power production to a level that may exceed the available land area within europe s borders one attractive solution from a cost and feasibility perspective is the development of large scale concentrating solar power plants in north africa and the middle east however these developments are seen by many people as risky in terms of both european energy security and in terms of the risks faced by project developers in this paper we focus on the latter of theses issues first we examine the risks that project developers are most concerned about and identify these as being associated not with terrorism and rogue state behavior but rather with corruption and inefficient and unpredictable bureaucracies second we identify a range of policy approaches that can reduce these risks either by mitigating their consequences or by seeking to eliminate their underlying causes third we investigate the financial benefits of taking such steps to reduce or eliminate investment risks we find the potential savings to european electricity consumers to exceed 200 billion

why do firms use incentives that have no incentive effects this paper illustrates why firms might choose to implement stock option plans or other pay instruments that reward luck i consider a model where adjusting compensation contracts is costly and where employees outside opportunities are correlated with their firms performance the model may help to explain the use and recent rise of broad based stock option plans as well as other financial instruments even when these pay plans have no effect on employees on the job behavior the model suggests that agency theory s often overlooked participation constraint may be an important determinant of some common compensation schemes particularly for employees below the highest executive ranks many compensation plans reward or punish employees for factors they cannot control an often discussed example of this phenomenon is executive compensation where stock options are not generally indexed to the overall market however many firms also offer firm wide stock options and profit sharing plans that provide even weaker incentives than executive plans after all most workers can expect to reap trivial personal gain from their contribution to firm value or profits i consider an explanation for this phenomenon in which firms contract with employees as a means of indexing wages to market rates rather than to provide incentives while much of the agency literature has concentrated on inducing optimal effort i consider the importance of the generally overlooked participation constraint i study a model in which employees outside opportunities are correlated with firm profits or stock price and in which both turnover and adjusting the pay scheme parameters are costly given these assumptions the firm may find it most profitable to pay the employee in a way that is correlated with the outside options presented by the outside labor market despite the requisite risk premium rather than pay a fixed wage that insures participation in all states the model derived below starts from the assumption that wage adjustments are costly but that workers are willing to make part of their pay contingent

diversification and the risk return trade off the article presents information on a study which investigated the risk return trade off at the level of individual firms with both accounting and market based measures of risk the author describe

the productivity effects of privatization longitudinal estimates from hungary romania russia and ukraine this paper estimates the effect of privatization on multifactor productivity using comprehensive panel data on initially state owned manufacturing firms in four economies we exploit the data s longitudinal dimension to control for preprivatization selection and estimate long run impacts the estimates are robust to functional form but sensitive to selection controls our preferred random growth estimates imply positive multifactor productivity effects of 15 percent in romania 8 percent in hungary and 2 percent in ukraine but a 3 percent effect in russia the foreign privatization effect is larger 18 35 percent in all countries positive domestic effects appear immediately in hungary romania and ukraine and continue growing thereafter but emerge only five years after privatization in russia

telecommunications infrastructure and economic development a simultaneous approach in diesem beitrag wird untersucht welchen einflus die telekommunikations infrastruktur auf die wirtschaftliche entwicklung ausubt diese wichtige frage hat im zusammenhang mit der diskussion um informationsautobahnen aktualitat erlangt in der vorliegenden studie wird der einflus der telekommunikations infrastruktur fur 21 oecdlander fur die vergangenen 20 jahre analysiert es wird ein strukturgleichungsmodell geschatzt in dem investitionen in die telekommunikations infrastruktur als endogene variable erfast werden und in einem mikromodell angebot und nachfrage nach telekommunikations investitionen spezifiziert werden das mikromodell wird dann zusammen mit der makro wachstumsgleichung geschatzt als ergebnis stellen die autoren dann eine positive kausalbeziehung zwischen telekommunikations investitionen und wirtschaftlicher entwicklung fest wenn eine kritische masse an telekommunikations infrastruktur existiert

performance feedback and firm risk taking the moderating effects of ceo and outside director stock options we contribute to the behavioral theory of the firm and the behavioral agency model by developing a theoretical framework that predicts the differential interaction effects of performance feedback and values of stock option grants of multiple agents on firm risk taking we explain how chief executive officers ceos versus outside directors awarded with stock option grants perceive negative or positive deviations from prior performance we argue that in a negative attainment discrepancy context high values of option grants will increase the risk aversion of ceos who already bear excessive employment and compensation risks resulting in less risk taking however it will enhance the risk taking propensity of influential outside directors who increase monitoring and support for risky projects because their risk preferences are better aligned with those of shareholders in a positive attainment discrepancy context high values of option grants will amplify risk aversion in both ceos and outside directors who

moving closer to the action examining compensation design effects on firm risk we examine the influence of ceo equity based compensation on strategic risk taking by the firm building off the behavioral agency model agency theory and prospect theory we develop arguments about when equity based compensation elements will increase or decrease executive risk propensity and in turn strategic risk taking incorporating a behavioral perspective into our models of incentive alignment provides us with new and potentially more accurate predictions about how individual elements of ceo pay will influence risk selection as well as how equity compensation interacts with cash compensation and with other factors to influence risk preferences in general this study provides evidence that ceo equity based compensation significantly influences strategic risk but that this influence is more nuanced and complex than conventional treatments of executive compensation assume in particular we find that different forms of equity based pay exhibit dissimilar influences on strategic risk and that their influence changes as their value and vesting status change second we find that cash based forms of pay moderate the incentive properties of equity based pay indicating that cash based pay may affect how executives perceive risks associated with equity pay finally we find that stock price volatility and board actions each also moderate the incentive effects of equity based pay in sum our results argue for increased recognition of a behavioral perspective on executive compensation and greater precision in how we measure and model the incentive alignment properties of ceo compensation

analyst following and pay performance sensitivity evidence from china we examine whether analyst following is associated with pay performance sensitivity in china based on our analyses of 17 020 chinese firm years from 2007 to 2015 we find that pay performance sens

endogenously chosen boards of directors and their monitoring of the ceo author s hermalin benjamin e abstract this paper develops a model in which the effectiveness of a board s monitoring of the ceo depends on the board s independence the independence of new directors is determined through negotiations implicit or explicit between the existing directors and the ceo the ceo s bargaining position and thus influence over the board selection process depends on an updated estimate of the ceo s ability based on prior performance many empirical findings about board structure and performance arise as equilibrium phenomena in this model we also explore the implications of this model for proposed regulations of corporate governance structures please contact the program in law and economics at boalt hall school of law uc berkeley berkeley ca 94720 for a copy of this paper

privatizing british coal an evolving policy problem abstract this paper examines how the announcement of pit closures in 1992 and subsequent developments in the coal industry have changed and narrowed the range of available privatization options the longer term economic forces shaping the industry s prospects and the effects of the 1992 announcement and subsequent events are analysed and the alternative models of privatization both before and after the 1992 announcement are evaluated continued market uncertainties associated at least in part with the development of gas generating capacity cast doubt on the attractiveness of british coal to private investors problems are likely to arise whichever structural option is chosen for the sale of british coal although the most feasible route appears to be to split the industry into two broad regions with scotland and other more isolated pits being disposed of separately

credit default swaps and the credit crisis many observers have argued that credit default swaps contributed significantly to the credit crisis of particular concern to these observers are that credit default swaps trade in the largely unregulated over the counter market as bilateral contracts involving counterparty risk and that they facilitate speculation involving negative views of a firm s financial strength some observers have suggested that credit default swaps would not have made the crisis worse had they traded on exchanges i conclude that credit default swaps did not cause the dramatic events of the credit crisis that the over the counter credit default swaps market worked well during much of the crisis and that exchange trading has both advantages and costs compared to over the counter trading though i argue that eliminating over the counter trading of credit default swaps could reduce social welfare i also recognize that much research is needed to understand better and to quantify the social gains and costs of derivatives in general and credit default swaps in particular

swinging for the fences the effects of ceo stock options on company risk taking and performance we unpack the concept of managerial risk taking distinguishing among three of its major elements the size of an outlay the variance of potential outcomes and the likelihood of extreme loss we

r d and ceo departure date do financial incentives make ceos more opportunistic the purpose of this article is to examine whether research and development r d expenditure is biased downward because of self serving behavior of highly incentivized managers this offers an insight into the general relationship between incentives and opportunism using instrumental variables and panel data methods for a sample of high r d spenders in the uk we examine whether r d is reduced in cases of imminent departure of the ceo results show evidence for this but only for the sample above the median in intensity of stock and options in the compensation package this suggests that opportunism is enhanced by inappropriately strong incentives the main results are robust to the inclusion of a number of corporate governance variables jel classification g30 o30

on the optimality of resetting executive stock options the practice of resetting strike prices on underwater executive stock options has drawn criticism for weakening managerial incentives our model shows that although the anticipation of resetting can negatively affect initial incentives resetting can still be an important value enhancing aspect of compensation contracts even from an ex ante standpoint in fact we find that some resetting is almost always optimal the relative advantages of resetting diminish with greater ability of managers to influence the resetting process greater relative importance of external factors on stock performance and lower costs of replacing incumbent managers

volatility spillovers and connectedness among credit default swap sector indexes this article studies volatility spill over effects and market connectedness using daily data of credit default swap spreads for u s companies over a period from 2007 to 2012 we quantify volatilit

managerial incentives and investment in r d in large multiproduct firms incentives for division managers in large firms affect their risk orientation and thus their decisions to invest in r d this paper reviews theory and hypothesizes that division managers incentive compensation that is based on financial performance is negatively related to risk taking as measured by r d intensity results of a study of 184 major u s firms suggest that incentives based on short term annual division financial performance are negatively related to total firm r d intensity after controlling for industry r d intensity firm diversification size and group structure furthermore the results suggest that an emphasis on long term financial incentives may mitigate the negative relationship between these incentives and r d intensity but does not promote risk taking the results suggest the importance of emphasizing strategic controls evaluating division managers based on operational understanding of strategies proposed strategic criteria as opposed to the use of financial controls evalua

accounting earnings and top executive compensation abstract this paper investigates the role of accounting earnings in top executive compensation contracts it provides evidence in support of the hypothesis that earnings based incentives help shield executives from market wide factors in stock prices the paper demonstrates that earnings reflect firm specific changes in value but are less sensitive to market wide movements in equity values as a result the inclusion of earnings based performance measures in executive compensation contracts helps shield executives from fluctuations in firm value that are beyond their control the hypothesis is shown to explain cross sectional variation in the use of earnings based incentives

proactive r d management and firm growth a punctuated equilibrium model the external environment is characterized by periods of relative stability interspersed with periods of extreme change implying that high performing firms must practice exploration and exploitation in order to survive and thrive in this paper we posit that r d expenditure volatility indicates the presence of proactive r d management and is evidence of a firm moving from exploitation to exploration over time this is consistent with a punctuated equilibrium model of r d investment where shocks are induced by reactions to external turbulence using an unbalanced panel of almost 11 000 firm years from 1997 to 2006 we show that greater fluctuations in the firm s r d expenditure over time are associated with higher firm growth developing a contextual view of the relationship between r d expenditure volatility and firm growth we find that this relationship is weaker among firms with higher levels of corporate diversification and negative among smaller firms and those in slow clockspeed industries

market structure and innovation a survey economics we all recite deals with allocation of limited resources towards satisfaction of unlimited wants resources are typically identified as land labor and capital plus a technology that determines their transformation into consumer goods disparity between the available goods and services and the desired gives rise to scarcity and the question of what how and for whom to produce the focus then shifts to description and evaluation of alternative resource allocation mechanisms for making the choices the pareto criterion by which an allocation of resources is deemed efficient if any reallocation improving the position of some individual worsens the position of others is a commonly employed gauge of a mechanism s performance in the absence of externalities increasing returns to scale and uncertainty a perfectly competitive market system yields a pareto optimal allocation of resources this underlies the view that individual self interest is compatible with society s interest the further conclusion that pareto optimality may not be achieved via the market system in the presence of monopoly elements provides an economic rationale for antitrust laws the objective of a resource allocation mechanism appears to be according to the analysis described above to make the best of available resources the alternative objective of relaxing constraints through expanding the resource base or developing new technology seems to be beyond its scope thus until rather recently technical advance had been regarded in the mainstream of economic theory as unmotivated by the quest for profits and substantially unaffected by resource allocation instead as j schmookler observed technology had been viewed as a parameter like the weather affecting the outcome of resource allocations but itself unaffected by them 84 1965 evidence that technological progress has significantly contributed to growth in productivity together with a substantial increase in research and development activity largely financed by government and carried out by industry see f machlup 51 1962 may have spurred reconsideration of this view once technical advance is regarded as an economic variable it is natural to in

internal capital market controls and financial performance in multidivisional firms it is proposed that within the population of m form firms the control systems necessary to realize economic benefits from interrelationships between subunits o f a firm are incompatible with the systems necessary to realize benef its from an m form type internal capital market this hypothesis is t ested on 156 large u k firms questionnaire data are used to classif y the firms according to their internal control characteristics the findings provide tentative support for the hypothesis copyright 1988 by blackwell publishing ltd

ceos outside employment opportunities and the lack of relative performance evaluation in compensation contracts although agency theory suggests that firms should index executive compensation to remove market wide effects i e rpe there is little evidence to support this theory oyer 2004 journal of finance 59 1619 1649 posits that an absence of rpe is optimal if the ceo s reservation wages from outside employment opportunities vary with the economy s fortunes we directly test and find support for oyer s 2004 theory we argue that the ceo s outside opportunities depend on his talent as proxied by the ceo s financial press visibility and his firm s industry adjusted roa our results are robust to alternate explanations such as managerial skimming oligopoly and asymmetric benchmarking

the impact of corporate governance practices on r d efforts a look at shareholders rights cross listing and control pyramid the paper considers the impact of multiple shareholder oriented governance practices on rd decisions based on a sample of 5 528 firms belonging to 110 large french listed business groups our results substantiate the idea that shareholder oriented governance practices and a lower position in a control pyramid are better for rd investment the introduction of any additional shareholder oriented practice is found to result in more rd we show however that this anglo americanization of the french corporate governance system is only partial we provide evidence of the co existence of an old french system of corporate governance with a hybrid model of corporate governance the lack of concrete results on complementarity among shareholder oriented governance practices casts doubt on the stability of this hybrid model in the french context

ceo hubris and firm risk taking in china the moderating role of managerial discretion this study linked ceo hubris to firm risk taking and examined the moderating role of managerial discretion in this relationship drawing on upper echelons theory and behavioral decision theory we

an analysis of the principal agent problem most analyses of the principal agent problem assume that the principal chooses an incentive scheme to maximize expected utility subject to the agent s utility being at a stationary point an important paper of mirrlees has shown that this approach is generally invalid we present an alternative procedure if the agent s preferences over income lotteries are independent of action we show that the optimal way of implementing an action by the agent can be found by solving a convex programming problem we use this to characterize the optimal incentive scheme and to analyze the determinants of the seriousness of an incentive problem

is there news in the prime rate using intraday data we find that bank announcements of changes in the prime rate have significant effects on dow jones stock price indexes and yields in the treasury bill futures market we find comparable effects using daily data for indexes of share prices of banks and financial firms as well as interest rates on various maturities of government securities our evidence is consistent with the view that banks have a comparative advantage in processing private information gained through bank borrower relations and the regulatory supervision process

ceo incentives and firm size we develop a model that clarifies how to measure ceo incentive strength and how to reconcile the enormous differences in pay sensitivities between executives in large and small firms the crucial parameter is shown to be the elasticity of ceo productivity with respect to firm size we find that ceo marginal products rise significantly with firm size confirming rosen s conjecture that ceos of large firms have a chain letter effect on firm performance and overall ceo incentives are roughly constant or decline slightly with firm size we employ a multitask model to discuss implications for the design of control systems

effect of the number of banking relationships on credit availability evidence from panel data of spanish small firms this paper investigates how the choice between single or multiple banking relationships affects credit availability for a complete panel of small and medium sized spanish firms the results seem to indicate the existence of rationing since a substitution relation has been found between trade and bank credit we also analyse the relationship between the level of indebtedness and the interest rate for each group of firms the results show that those smes that work with fewer financial intermediaries obtain fewer funds for the same increase in the interest rate which indicates that these companies have more financial restraints

a behavioral understanding of investment horizon and firm performance observers have argued that firms overly emphasize short term results at the expense of long run value using a behavioral perspective we analyze three hypotheses related to this general argument first we examine the association of investment time horizons with firm performance contributing new theory that argues for a quadratic rather than linear association second because the tendency toward immediate results could reflect stock market pressures we consider how the interaction of investor patience and firm horizon relates to firm performance third we examine the argument s implication that most firms have investment horizons at a level where marginal increases in horizon associate positively with firm performance measuring horizon as the expected useful lives of capital expenditures we find empirical support for the hypothesized quadratic relation in a large scale multiyear sample of u s publicly held manufacturing firms and confirm that a majority of firms have horizons in the region where our models predict increases in horizon positively influence performance we also find that the most positive returns occur when long horizon investments are aligned with investor patience

executive compensation a modern primer this article studies traditional and modern theories of executive compensation bringing them together under a simple unifying framework accessible to the general interest reader we analyze assignment models of the level of pay and static and dynamic moral hazard models of incentives and compare their predictions to empirical findings we make two broad points first traditional theories find it difficult to explain the data suggesting that compensation results from rent extraction by ceos however more modern shareholder value theories that arguably better capture the ceo setting do deliver predictions consistent with observed practices suggesting that these practices need not be inefficient second seemingly innocuous features of the modeling setup often made for tractability or convenience can lead to significant differences in the model s implications and conclusions on the efficiency of observed practices we close by highlighting apparent inefficiencies in executive compensation and additional directions for future research