organizational design decision rights and incentive contracts where should decision rights be lodged in organizations michael c jensen and william h meckling 1992 argue that moving a decision away from the inherently best informed party involves costs in communication and garbling but may lodge it with someone who has better incentives to make good decisions generally however we expect that incentives are part of the organizational design why not just provide incentives to those with the best information so that they make the right decisions one reason is that the available incentive instruments must serve multiple purposes and designing them to induce better decisions worsens performance against other organizational objectives our experience suggests that this is a common situation in actual organizations the means available to affect one sort of behavior or decision inevitably affect the incentives governing other choices then the design of incentive schemes and the allocation of decision rights become interlinked this paper looks at this idea in the specific context of a principal s problem of inducing agents to provide unobservable effort while also motivating the efficient selection of investments each of these problems has been extensively studied in isolation on inducing effort see e g bengt holmstrom 1979 and holmstrom and paul milgrom 1991 on decisions see e g eugene f fama and jensen 1983 milgrom and roberts 1990a b philippe aghion and jean tirole 1997 matthias dewatripont and tirole 1999 we thus know that motivating effort is done best by rewarding agents on precise measures of their effort not necessarily on the total value created in the firm at the same time it is clear that getting the right investment choices may require that the decision makers rewards be tied to total value created the difficulty is that the available measures do not allow doing both the only available performance measures are aggregates whose component pieces cannot be disentangled while contracts must be written in advance of learning about investment possibilities including many contingencies in the contracts ex ante is impossible and ongoing renegotiation in every ex post eventuality is prohibitively costly more formally we assume that it is not possible to contract on investment projects nor can the principal bargain with the agents over the adoption of these projects once they are identified instead returns to projects are reflected in the performance measures available for use in the effort incentive contracting then the incentives for effort and for decisions are inextricably tied together in this framework we explore the interactions among the design of jobs and assignment of individuals to tasks the shape and intensity of effort incentives and the allocation of authority over project selection we argue that it may indeed be optimal to assign decisions rights to someone other than the best informed party an authority based hierarchy then emerges endogenously with some agents being given the right to make organizational decisions over projects that others discovered moreover as in herbert simon 1951 those in authority will make the decisions in a self interested way simon emphasized that this discussants michael riordan columbia university bengt holmstrom massachusetts institute of technology w bentley macleod university of southern california

an empirical test of a cross national model of corporate social responsibility most models of corporate social responsibility revolve around the controversy as to whether business is a single dimensional entity of profit maximization or a multi dimensional entity serving greater societal interests furthermore the models are mostly descriptive in nature and are based on the experiences of western countries there has been little attempt to develop a model that accounts for corporate social responsibility in diverse environments with differing socio cultural and market settings in this paper an attempt has been made to fill this gap by developing a two dimensional model of corporate social responsibility and empirically testing its validity in the context of two dissimilar cultures australia and bangladesh the two dimensions are the span of corporate responsibility narrow to wider perspective and the range of outcomes of social commitments of businesses cost to benefit driven perspective the test results confirm the validity of the two dimensional model in the two environments the factor analysis revealed two leading dimensions cluster analysis pointed to two distinctive clusters of managers in both australia and bangladesh one consisting of managers with a broad contemporary concept of social responsibility and the other with a limited narrow view the paper concludes that corporate social responsibility is two dimensional and universal in nature and that differing cultural and market settings in which managers operate may have little impact on the ethical perceptions of corporate managers

delegation and incentives this article analyzes the relation between authority and incentives it extends the standard principal agent model by a project selection stage in which the principal can either delegate the choice of project to the agent or keep the authority the agent s subsequent choice of effort depends both on monetary incentives and the selected project we find that the consideration of effort incentives makes the principal less likely to delegate the authority over projects to the agent in fact if the agent is protected by limited liability delegation is never optimal

a behavioral theory of r d expenditures and innovations evidence from shipbuilding i base an integrated model of innovation development and launch on the behavioral theory of the firm this model specifies that research and development expenses are increased when low performance causes problemistic search and when excess resources cause slack search innovations generated by search are launched if low performance gives managers high risk tolerance using data from shipbuilding firms i show that high performance reduces r d intensity and innovation launches and high slack increases r d intensity as predicted

authority and incentives in organizations the paper analyzes the choice of organizational structure as solution to the trade off between controlling behavior based on authority rights and minimizing costs for implementing high efforts the analysis includes the owner of a firm a top manager and two division heads if it is more expensive to incentivize the division heads the owner will prefer full delegation of authority to them to replace their high incentive pay by incentives based on private benefits of control in that situation decentralization is optimal given that selfish behavior is more important than cooperation for maximizing returns but concentrated delegation of full authority to a single division head is optimal for cooperation being crucial if however incentivizing the division heads is clearly less expensive than creating incentives for the top manager the owner will choose centralization given that cooperation is the dominating issue but partial delegation if selfish behavior is crucial

why do salespeople spend so much time lobbying for low prices in business to business settings a company s sales force often spends considerable time lobbying internally for authorization to charge lower prices these internal lobbying activities are time consuming and divert attention from other tasks such as interacting with customers we explain why internal lobbying activities serve an important role they help the firm elicit truthful reporting of demand information from the sales force as a result it may be profitable for the firm to require lobbying and make the requirement onerous even though lobbying is a nonproductive activity that creates an additional administrative burden and imposes a deadweight loss

the stock market effect of air pollution evidence from china abstractin financial studies environmental stimuli such as sunshine temperature and daylight are often used as proxies for people s collective mood swings to test their effects on the stock market china has experienced serious air pollution problems in recent years and chinese public awareness of air pollution has soared in this paper we use china as a natural experiment to investigate the effect on stock returns of depressed moods induced by air pollution daily air pollution data from 2005 to 2014 are analysed and the results obtained from the empirical research show that a contemporaneous negative and a two day lagged positive relationship exists between air pollution levels and stock returns over this time period the relationship is mediated by the influence of air pollution on investment decisions the results also indicate that the effect is weakened for companies that protect air quality but no stronger effect is detected for polluting companies the findings imply that air pollution is a

variations in r d investments of family and nonfamily firms behavioral agency and myopic loss aversion perspectives the behavioral agency model suggests that to preserve socioemotional wealth loss averse family firms usually invest less in r d than nonfamily firms however behavioral agency model predictions a

stock market returns a note on temperature anomaly this study investigates whether stock market returns are related to temperature research in psychology has shown that temperature significantly affects mood and mood changes in turn cause behavioral changes evidence suggests that lower temperature can lead to aggression while higher temperature can lead to both apathy and aggression aggression could result in more risk taking while apathy could impede risk taking we therefore expect lower temperature to be related to higher stock returns and higher temperature to be related to higher or lower stock returns depending on the trade off between the two competing effects we examine many stock markets world wide and find a statistically significant negative correlation between temperature and returns across the whole range of temperature apathy dominates aggression when temperature is high the observed negative correlation is robust to alternative tests and retains its statistical significance after controlling for various known anomalies

incentives in principal agent relationships this article identifies some of the major issues that have been examined in the literature on incentives the article begins by discussing the frictions that lie at the heart of incentive problems next the principal s optimal response to these frictions is explored taking as given the characteristics of the agents with whom the principal interacts in a nonrepeated setting the design of individualized contracts contests and tournaments is analyzed then the principal s task of selecting the best agent is addressed and repeated agency relationships are considered

seasonal darkness and ipo abstract this paper analyses the possible relationship between a particular natural phenomenon the shortening of light hours in autumn and a financial issue the level of underpricing recorded on the first day of listing by the companies subject to initial public offering ipo it analyses a sample of 3102 ipos in 32 countries in the period between january 1 2006 and december 31 2016 the empirical evidence supports the assumption that seasonal darkness when there is a lack of light has a positive impact on the raw initial returns of the ipos made during this period the results obtained confirm the previous studies aimed at investigating the phenomenon suggest a possible behavioral interpretation and in conclusion make a positive contribution deriving from the large sample size the consideration of different latitudes and the assumed perspective

why don t you trade only four days a year an empirical study into the abnormal returns of quarters first trading day in this research i examined a calendar anomaly that occurs at the beginning of each quarter through an examination of 34 years of daily and annual returns for the s p500 and 13 years of returns for popular etfs i have demonstrated the existence of the first day of quarter fdq effect by trading only four days a year from the beginning of 2000 until the end of 2013 an investor could have gained 113 1 of the s p500 returns for that period while being exposed to stock risk for only 56 days moreover for 11 of those 14 years of trading the fdq was responsible for more than 10 of the annual returns only for two years since 2000 2001 2005 has the fdq yielded a negative return the biggest beneficiary of the fdq is the financial sector which for the last 13 years of investing has been non fertile showing 6 12 total return investing only at the beginning of each quarter for a total of 52 days would have yielded a return of 40 17 the next beneficiary of the fdq is the technological sector the 82 5 of total return gained in this sector over the last 13 years could have been gained in only 52 days of trading

family firms corporate social performance a calculated quest for socioemotional wealth this study investigates the engagement of family firms in corporate social responsibility we first compare their corporate social performance csp to non family firms then following recent evidence on the heterogeneity of family firms we examine two factors that may influence csp within family firms the level of family control and the governance orientation of the country in which they operate this research is based on a theoretical framework which considers both agency and socioemotional wealth sew influences on family firms csr engagements overall we find that family firms exhibit lower csp than non family firms but when focusing on family firms our analyses show a curvilinear relationship between family control and csp at lower levels of control family owners invest more in social initiatives to protect their sew beyond a threshold level of control that we estimate at 36 in our sample economic considerations prevail over sew and social performance starts decreasing we also find that family firms operating in stakeholder oriented countries are more attentive to social concerns than those operating in more shareholder oriented countries

is it the weather response abstract kamstra kramer and levi kkl in their comment seem to miss the main point of our paper many things are correlated with the seasons so it is difficult to distinguish between them when we try to explain the well known summer winter pattern in stock returns finding an isolated seasonal affective disorder sad effect without proper control variables does not disprove our point but strengthens it to sidestep all of the issues they raise and take our point to the extreme we show using plain vanilla regressions that the seasonal stock market pattern they attribute to sad can also be explained by variables like ice cream consumption or airline travel the new variations of sad variables onset and incidence kkl propose in their recent work for north america are even more problematic than the original sad variables we find that these new sad proxies are not significant in countries where according to kkl they should be canada and the united states

corporate social responsibility and family business in spain despite the economic relevance and distinctiveness of family firms little attention has been devoted to researching their nature and functioning traditionally family firms have been associated both to positive and negative features in their relationships with the stakeholders this can be linked to different orientations toward corporate social responsibility thus this research aims to identify the approaches that spanish family firms maintain about social responsibility based on the model developed by quazi and o brien journal of business ethics 25 33 51 2000 an empirical study carried out for 112 spanish family firms gives support to our initial assumption about these organizations not being a homogeneous group in terms of their orientation towards corporate social responsibility the differences in perceptions do not seem to be associated to biographical characteristics these results lead to some relevant academic and practical implications that suggest interesting lines for future research

the effect of myopia and loss aversion on risk taking an experimental test myopic loss aversion is the combination of a greater sensitivity to losses than to gains and a tendency to evaluate outcomes frequently two implications of myopic loss aversion are tested experimentally 1 investors who display myopic loss aversion will be more willing to accept risks if they evaluate their investments less often 2 if all payoffs are increased enough to eliminate losses investors will accept more risk in a task in which investors learn from experience both predictions are supported the investors who got the most frequent feedback and thus the most information took the least risk and earned the least money language en

strategic reference point theory how can executives achieve a match between expected external environmental conditions and internal organizational capabilities that facilitates improved performance this paper argues that a firm s choice of reference points can help achieve strategic alignment capable of yielding improved performance and potentially even a sustainable competitive advantage building upon prospect theory and other relevant theoretical perspectives the strategic reference point srp matrix is developed a firm s srp consists of three dimensions internal capability external conditions and time a theory is developed which posits an optimal srp structure and propositions are offered which articulate the expected relationships between the srp strategic choice behavior and firm performance the paper closes with some suggestions for using strategic reference points in both research and practice

does delegation increase worker training we model a principal firm offering training to its agent worker under two alternative organizational structures integration where the principal retains authority to overrule the investment project recommended by the worker and delegation where the principal cannot overrule the worker s preferred investment project we assume that training reduces the worker s effort cost of assembling information about alternative projects payoffs and identify the conditions under which delegation increases the profit maximizing intensity of training empirical estimates from matched employer employee data show that workplaces delegating authority do provide more worker training this result persists in two cross sections in panel fixed effect estimates and critically in an instrumental variable exercise that also controls for establishment fixed effects jel d21 d22 d23 m53 m54

a resource based perspective on corporate environmental performance and profitability drawing on the resource based view of the firm we posited that environmental performance and economic performance are positively linked and that industry growth moderates the relationship with the returns to environmental performance higher in high growth industries we tested these hypotheses with an analysis of 243 finns over two years using independently developed environmental ratings results indicate that it pays to be green and that this relationship strengthens with industry growth we conclude by highlighting the study s academic and managerial implications making special reference to the social issues in management literature

does equity ownership matter for corporate social responsibility a literature review of theories and recent empirical findings based on the concept of shareholder primacy many scholars have argued that it is more important for businesses to earn profits for their shareholders than to provide benefits to society at large corporate social responsibility csr is often regarded as an investment that comes at the expense of shareholders in contrast research analyzing the connections between the equity ownership structure of a company and its level of csr engagement suggests that csr offers benefits to shareholders that go beyond direct financial returns from investments this study provides a comprehensive review and systematic assessment of theoretical considerations and approaches regarding different forms of equity ownership and their relationships to csr and it discusses the relevant benefits and motivations of shareholders the perceived value of these csr benefits varies among different types of shareholders as they assign unequal values to short term financial or to rather long term csr benefits based on a literature sample of 146 publications this review demonstrates central problems inherent in previous analyses given the ambiguous and partially contradictory findings of prior research this study identifies potential moderating influences that help clarify empirical evidence a contingency approach is suggested in future research as this can help resolve the problem of contradictory empirical findings and theoretical arguments

family firm governance strategic conformity and performance institutional vs strategic perspectives a fundamental schism divides the family firm and strategy literatures on the one hand and the institutional literature on the other regarding both the situational prevalence and the utility of conforming behavior the first two schools respectively view strategic differentiation as especially common among family firms and an important source of competitive advantage by contrast the reasoning of institutionalists would suggest that family firms will be subject to unusually powerful motivations to conform in part because of their pursuit of socioemotional wealth objectives unfortunately the relationships between conformity and family firm governance and in fact governance in general have not been amply studied this analysis of fortune 1000 firms finds considerable support for the institutional perspective family involvement is related to greater not lesser conformity in many aspects of strategy although strategic conformity related to superior returns on assets it did not enhance firm market valuations

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

information management in incentive problems we extend the standard procurement model to examine how an agent is optimally induced to acquire valuable planning information before he choose an unobservable level of cost reducing effort concer

environmental respect ethics or simply business a study in the small and medium enterprise sme context in recent years there have been ever growing concerns regarding environmental decline causing some companies to focus on the implementation of environmentally friendly supply production and distribution systems such concern may stem either from the set of beliefs and values of the company s management or from certain pressure exerted by the market consumers and institutions in the belief that an environmentally respectful management policy will contribute to the transmission of a positive image of the company and its products sometimes however ethics and market rules are not enough to deal with this situation and specific laws must be considered this is the case when companies base their activity on the ethics of self interest concentrating their efforts on projecting an adequate image e g environmental respect rather than fundamentally behaving in environmentally respectful ways this article taking as reference the sme context discusses the reasons for implementing environmentally friendly systems both ethics and business seem to be relevant and therefore a certain balance between market and interventionism seems to be necessary

good day sunshine stock returns and the weather psychological evidence and casual intuition predict that sunny weather is associated with upbeat mood this paper examines the relationship between morning sunshine in the city of a country s leading stock exchange and daily market index returns across 26 countries from 1982 to 1997 sunshine is strongly significantly correlated with stock returns after controlling for sunshine rain and snow are unrelated to returns substantial use of weather based strategies was optimal for a trader with very low transactions costs however because these strategies involve frequent trades fairly modest costs eliminate the gains these findings are difficult to reconcile with fully rational price setting

veto based delegation in a principal agent model with hidden information and no monetary transfers i establish the veto power principle any incentive compatible outcome can be implemented through veto based delegation with an endogenously chosen default decision this result demonstrates the exact nature of commitment powers required by the principal 1 to design the default outcome and 2 to ensure that she has almost no formal control over the agent s decisions

on partial contracting this paper investigates contracting situations where giving away some control rights enhances both the donor s and the receiver s incentives to cooperate in the future we define a partial contracting framework with nonverifiable actions for which either control is contractible contractible control actions or the right to transfer control ex post to another party is contractible transferable control actions under incomplete information when control over particular actions is transferable but not contractible it can be optimal to give one party the right to transfer control over a particular action to the other party in order for that party to build a reputation regarding her willingness to cooperate in the future c 2002 elsevier science b v all rights reserved

the provision of incentives in firms i ncentives are the essence of economics despite many wide ranging claims about their supposed importance there has been little empirical assessment of incentive provision for workers the purpose of this paper is to critically overview existing work on the provision of incentives since the interests of workers and their employers are not always aligned a large theoretical literature has emphasized how firms design compensation contracts to induce employees to operate in the firm s interest this literature has reached into many areas of compensation and has pointed to a multitude of different mechanisms that can be used to induce workers to act in the interests of their employers these include piece rates options discretionary bonuses promotions profit sharing efficiency wages deferred compensation and so on my objective here is to evaluate this literature in the light of a growing empirical literature on compensation where possible i will address the literature from two perspectives first an underlying assumption of this literature is that individuals respond to contracts that reward performance accordingly i consider whether agents behave in this way and whether these responses are always in the firm s interest second i address whether firms write contracts with these responses in mind in other words do contracts look like the predictions of the theory incentives are provided to workers

broader product line a necessity to achieve success strategic product line breadth decisions evoke differential responses from the manufacturing and the marketing areas manufacturing prefers keeping process disruptions to a minimum and as a result discourages product proliferation however marketing in its attempt to match products to heterogeneous consumer needs and gain market share emphasizes a broader product line we systematically investigate the market benefits and cost disadvantages of broader product lines on a large sample of over 1 400 business units our results indicate significant market share benefits and increases in firms profitability with broader product lines moreover widely held beliefs of increases in production costs are not empirically supported american manufacturing firms may indeed be flexible enough to accommodate product variety without significant detrimental effects on costs

is it the weather we show that results in the recent strand of the literature which tries to explain stock returns by weather induced mood shifts of investors might be data driven inference more specifically we consider two recent studies kamstra mark j kramer lisa a levi maurice d 2003a winter blues a sad stock market cycle american economic review 93 1 324 343 cao melanie wei jason 2005 stock market returns a note on temperature anomaly journal of banking and finance 29 6 1559 1573 that claim that a seasonal anomaly in stock returns is caused by mood changes of investors due to lack of daylight and temperature variations respectively while we confirm earlier results in the literature that there is indeed a strong seasonal effect in stock returns in many countries stock market returns tend to be significantly lower during summer and fall months than during winter and spring months as documented by bouman and jacobsen bouman sven jacobsen ben 2002 the halloween indicator sell in may and go away another puzzle american economic review 92 5 1618 1635 there is little evidence in favor of a sad or temperature explanation in fact we find that a simple winter summer dummy best describes this seasonality our results suggest that without any further evidence the correlation between weather related variables and stock returns might be spurious and the conclusion that weather affects stock returns through mood changes of investors is premature

a note on strategic delegation the market share case we consider a two stage market share delegation game with two competing firms each owner delegates the production decision to a manager each manager s remuneration is a weighted sum of profits and market share the market share delegation game results in higher duopoly profits than the sales delegation game both output delegation models lead to more aggressive managerial behavior than the standard cournot case implying lower profitability and higher social welfare similar results are obtained for the bertrand version of the delegation model market share delegation is the dominant strategy in a game in which owners can choose not to hire a manager or if they do so to pay their manager a bonus based on profits and sales or market share

the tenuous trade off between risk and incentives empirical work testing for a negative trade off between risk and incentives has not had much success the data suggest a positive relationship between measures of uncertainty and incentives rather than the posited negative trade off i argue that the existing literature fails to account for an important effect of uncertainty on incentives through the allocation of responsibility to employees when workers operate in certain settings firms are content to assign tasks to workers and monitor their inputs by contrast when the situation is more uncertain they delegate responsibility to workers but to constrain their discretion base compensation on observed output

limited liability contracts between principal and agent abstract the optimal strategy of the principal is examined in an environment where there are ex post limitations on the maximum penalty that can be imposed on a riskneutral agent contrary to the case in which such limitations are not imposed it is in the principal s interest to deliberately forego the opportunity to induce socially efficient behavior and to instead design a contract that induces the agent to realize an efficient outcome only in the most productive state of nature and perhaps in certain very unproductive states the properties of the contract are examined in detail

winter blues a sad stock market cycle and god said let there be light and there was light and god saw that the light was good genesis 1 3 depression has been linked with seasonal affective disorder sad a condition that affects many people during the seasons of relatively fewer hours of daylight experimental research in psychology has documented a clear link between depression and lowered risktaking behavior in a wide range of settings including those of a financial nature through the links between sad and depression and between depression and risk aversion seasonal variation in length of day can translate into seasonal variation in equity returns based on supportive evidence from psychology which suggests sad is linked closely with hours of daylight we consider stock market index data from countries at various latitudes and on both sides of the equator we model differences in the seasonal variation of daylight across coun

double sided moral hazard and the nature of share contracts contractual arrangements involving revenue profit sharing are often based on fairly simple often linear rules in addition in many contexts these contracts are not finely adjusted to the particular circumstances of individual agents or markets nor do they vary over time to the extent current theories based on optimal contracting suggest they should we develop a simple model of such revenue or profit sharing arrangements based on double sided moral hazard and show that this model can account for many of these stylized facts more specifically the model shows that linear contracts can be optimal and that benefits from customizing terms can in some cases be quite limited if not zero

how can responsible family ownership be sustained across generations a family social capital approach responsible family ownership rfo is a combination of the family s commitment to the family firm s ff s stakeholders in the long term and the explicit behaviour of the family members associated with the firm however families are not individuals but rather a system of relationships among family members in such a context misunderstandings in communication anachronistic mentalities and different value systems can block the intergenerational transmission of rfo consequently the responsibility of the family towards the ff s stakeholders may be damaged and the firm s socially responsible behaviour hindered this paper aims to identify how rfo is transferred across generations and to ascertain the role that family social capital fsc plays in preserving the transmission of rfo from generation to generation our research is based on three in depth case studies of mexican family owned small and medium sized enterprises first the paper identifies and contrasts a set of fsc specific factors and problems which play a relevant role in the transmission of rfo while recognizing the influence of the mutually reinforcing dynamics of fsc dimensions secondly the family s honourableness a lander in j bus ethics 116 4 751 767 2013 is identified as a key driver for sustaining the transmission of rfo finally the paper identifies rfo institutionalization required to face the intrinsic problems of transmitting rfo in growing families

the pricing of temperature futures at the chicago mercantile exchange abstract this paper analyzes observed prices of us temperature futures at the chicago mercantile exchange cme results show that an index modeling approach without detrending captures the prices exceptionally well moreover weather forecasts significantly influence prices up to 11 days ahead it is shown that valuations of temperature futures relying on a model without detrending yield biased valuations by overpricing winter contracts and underpricing summer contracts several trading strategies are devised to exploit the mispricing observed at the cme and to demonstrate that speculating on temperature futures can not only generate high overall returns but also perform well on a risk adjusted basis

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

is it the weather comment this comment discusses some errors in a recent paper by jacobsen and marquering jacobsen b marquering w 2008 is it the weather journal of banking and finance 32 4 526 540 in which the authors challenge our previous finding that stock market returns exhibit seasonal patterns consistent with the influence of seasonal affective disorder on investor risk aversion we find that we cannot replicate the authors findings even after corresponding with them furthermore we document several problems with their methodology including misspecification of their economic model misspecification of their econometric model and use of inappropriate data while we agree that seasonal affective disorder is not an explanation for all variation in equity markets we do maintain that careful analysis leads to economically and statistically significant evidence of the effect we originally documented

optimal debt structure and the number of creditors within an optimal contracting framework we analyze the optimal number of creditors a company borrows from we also analyze the optimal allocation of security interests among creditors and intercreditor voting rules that govern renegotiation of debt contracts the key to our analysis is the idea that these aspects of the debt structure affect the outcome of debt renegotiation following a default debt structures that lead to inefficient renegotiation are beneficial in that they deter default but they are also costly if default is beyond a manager s control the optimal debt structure balances these effects we characterize how the optimal debt structure depends on firm characteristics such as its technology its credit rating and the market for its assets

the economics of clear advice and extreme options i study a principal agent model in which the agent collects information and then chooses a verifiable action i show that the principal can find it desirable to constrain the agent s action set even though there is no disagreement about the ranking of actions ex post the elimination or penalization of intermediate actions which are optimal when information is poor improves incentives for information collection i characterize optimal action sets when the agent is infinitely risk averse with respect to income shocks and optimal incentive schemes when the agent is risk neutral copyright 2005 wiley blackwell

sentiment and stock returns the sad anomaly revisited notice this is the author s version of a work that was accepted for publication in journal of banking finance changes resulting from the publishing process such as peer review editing corrections structural formatting and other quality control mechanisms may not be reflected in this document changes may have been made to this work since it was submitted for publication a definitive version was subsequently published in journal of banking finance vol 34 issue 6 june 2010 doi 10 1016 j jbankfin 2009 11 027

warranties durability and maintenance two sided moral hazard in a continuous time model double moral hazard in continuous time generates the familiar warranty pattern with full coverage for an initial block of time the more complete the warranty the better the producer s durability incentives and the worse the consumer s maintenance incentives using continuous time highlights the need for some warranty bound to avoid reaching the first best as an unreasonable limit early in the paper an exogenous bound is used while later the bound arises endogenously from the possibility of abuse and repair a quadratic example shows that the warranty s duration depends on the relative severity of the two moral hazard problems

information incentives and organizational mode we examine the choice of organizational mode for a two stage production process wherein cost realizations at each stage are observed only by the producing party when these costs are positively correlated the principal prefers to undertake second stage production herself when the correlation is negative and sufficiently small she will prefer that the agent who performs the first stage also perform the second for large negative correlation either mode might be preferred when costs are uncorrelated the principal is indifferent between modes

determinants of firms backward and forward looking r d search behavior this study develops and operationalizes a behavioral forward looking search model by incorporating prospect theory organizational risk literature and the logic of the behavioral theory of the firm with recognition of the bounded rationality of decision makers and the goal directed rule based nature of organizations this model suggests that a comparison between firms performance expectation and performance target translates the cognitive representation of the firms future into their subsequent actions by examining the research and development r d expenditures of u s manufacturing firms from 1980 to 2001 this study explores how performance aspirations expectations and slack affect decision making about firms r d search investments the findings show that both performance feedback and performance prospect are important determinants of firms search behavior after controlling for firm industry and time effects in addition backward and forward looking determinants have interactive effects on search behavior firms problem driven search activity further increases when firms feel unlikely to achieve the performance target for another year in contrast search intensity is reduced when firms expect to improve their performance from an underperforming situation to an outperforming situation the findings suggest that future research on performance feedback and experiential learning should also consider the effect of forward looking prospects on firm behavior

product warranties and double moral hazard this article explores a model of warranties in which moral hazard problems play a key role the goal is to understand the important characteristics of warranties including their provision of incomplete insurance and the relationship between product quality and coverage we analyze a model in which buyers and sellers take actions that affect a product s performance since these actions are not cooperatively determined an incentives problem arises we characterize the optimal warranty contract and undertake comparative statics to determine the predicted correlation of warranty coverage and product quality

stewardship or agency a social embeddedness reconciliation of conduct and performance in public family businesses two contradictory perspectives of family business conduct and performance are prominent in the literature the stewardship perspective argues that family business owners and managers will act as farsighted stewards of their companies investing generously in the business to enhance value for all stakeholders by contrast the agency and behavioral agency perspectives maintain that major family owners in catering to family self interest will underinvest in the firm avoid risk and extract resources this paper argues that both these views have application but under different circumstances determined in part by the degree to which the firm and its executive actors are embedded within the family and thus identify with its interests stewardship behavior will be less common and agency behavior will be more common the greater the number of family directors officers generations and votes and the more executives are susceptible to family influence these findings are supported among fortune 1000 firms as well as among the subsample of those firms that are family businesses

why are bad products so hard to kill it is puzzling that firms often continue to invest in product development projects when they should know that demand will be low we argue that bad products are hard to kill because firms face an inherent conflict when designing managers incentives rewarding success encourages managers to forge ahead even when demand is low to avoid investing in low demand products the firm must also reward decisions to kill products however rewarding managers for killing products effectively undermines the rewards for success the inability to resolve this tension forces the firm to choose between paying an even larger bonus for success and accepting continued investment in low demand products we explore the boundaries of this argument by analyzing how the timing of demand information affects product investment decisions

inside the family firm the role of families in succession decisions and performance this paper uses a unique dataset from denmark to investigate the impact of family characteristics in corporate decision making and the consequences of these decisions on firm performance we focus on the decision to appoint either a family or an external chief executive officer ceo the paper uses variation in ceo succession decisions that result from the gender of a departing ceo s first born child this is a plausible instrumental variable iv as male firstchild firms are more likely to pass on control to a family ceo relative to female first child firms but the gender of a first child is unlikely to affect firms outcomes we find that family successions have a large negative causal impact on firm performance operating profitability on assets falls by at least four percentage points around ceo transitions our iv estimates are significantly larger than those obtained using ordinary least squares furthermore we show that family ceo underperformance is particularly large for firms in high growth industries and for relatively large firms overall the empirical results demonstrate that professional non family ceos provide extremely valuable services to the organizations they head

stakeholder theory corporate governance and public management what can the history of state run enterprises teach us in the post enron era this paper raises a challenge for those who assume that corporate social responsibility and good corporate governance naturally go hand in hand the recent spate of corporate scandals in the united states and elsewhere has dramatized once again the severity of the agency problems that may arise between managers and shareholders these scandals remind us that even if we adopt an extremely narrow concept of managerial responsibility such that we recognize no social responsibility beyond the obligation to maximize shareholder value there may still be very serious difficulties associated with the effective institutionalization of this obligation it also suggests that if we broaden managerial responsibility in order to include extensive responsibilities to various other stakeholder groups we may seriously exacerbate these agency problems making it even more difficult to impose effective discipline upon managers hence our central question is a strong commitment to corporate social responsibility institutionally feasible in searching for an answer we revisit the history of public management and in particular the experience of social democratic governments during the 1960s and 1970s and their attempts to impose social responsibility upon the managers of nationalized industries the results of this inquiry are less than encouraging for proponents of corporate social responsibility in fact the history of public sector management presents a number of stark warnings which we would do well to heed if we wish to reconcile robust social responsibility with effective corporate governance

the optimal allocation of decision and exit rights in organizations we show that in a bilateral relation with conflicting preferences and transferable utility it is unambiguously optimal to assign the authority over project decisions to the privately informed rather than the uninformed party this holds irrespective of the degree of conflict and the distribution of private information under the optimal contract the uninformed party is protected by an exit option which it will exert when the decision maker has not chosen the promised decision exit terminates the relation and diminishes the project surplus we show that the first best efficient solution can be obtained by such a contract

delegation to encourage communication of problems we study a principal s choice to centralize or delegate decisions to an agent when delegation can be used to encourage the agent to communicate potential problems we find that the principal may choose centralization either to exercise better control over the agent s actions or to provide stronger incentives delegation emerges in equilibrium only if the costs of effort to acquire information for both the principal and the agent are sufficiently high we find that increases in the principal s penalties for an incorrect decision may increase the principal s expected payoff owing to optimal organizational responses in addition catastrophic risk the risk of incorrectly accepting a defective audit or product may be greater under centralization than under delegation furthermore catastrophic risk can be increased by well intentioned legislative efforts to decrease such risk by for example increasing the agent s penalties for failing to take a corrective action because the organizational structure may change

losing sleep at the market the daylight saving anomaly reply motivated by the recent flurry of activity in sleep research this paper explores the connection between sleep disruptions following spring and fall clock shifts associated with daylight savings time and equity returns it is shown that the weekend effect in the form of the lower than expected friday to monday returns is particularly pronounced for the two weekends involving daylight savings clock changes this abstract was borrowed from another version of this item

the corporate social performance financial performance link strategic managers are consistently faced with the decision of how to allocate scarce corporate resources in an environment that is placing more and more pressures on them recent scholarship in strategic management suggests that many of these pressures come directly from sources associated with social issues in management rather than traditional arenas of strategic management using a greatly improved source of data on corporate social performance this paper reports the results of a rigorous study of the empirical linkages between financial and social performance corporate social performance csp is found to be positively associated with prior financial performance supporting the theory that slack resource availability and csp are positively related csp is also found to be positively associated with future financial performance supporting the theory that good management and csp are positively related 1997 by john wiley sons ltd