a dynamic tiebout theory of voluntary vs involuntary provision of public goods this paper considers a dynamic model of tiebout like migration between communities that utilize distinct allocation procedures for public goods at issue is whether voluntary or compulsory procedures are more likely to prevail over time we model infinitely lived individuals who make repeated sequential location decisions over one of two communities each community uses a distinct mechanism for allocating public goods the first is one in which contributions are given voluntarily by the citizenry of the community the second is a compulsory scheme by which individuals are taxed proportionately to wealth with the tax determined by a majority vote opportunities to accumulate wealth exist via accumulation of public capital the markov perfect equilibria of the dynamic game are studied our main result shows that when accumulated wealth converges to a steady state individuals locational choices eventually select the involuntary provision mechanism this holds despite the fact that unanimous location in the voluntary provision community may in many cases remain as a nash equilibrium of the static game each period we also describe conditions under which voluntary provision survives these conditions require that accumulation of capital fails to decrease wealth dispersion over time the results are shown to be consistent with findings relating inequality to school choice

a tiebout theory of public vs private provision of collective goods abstract we study whether coercive public provision or voluntary private provision of public goods can survive when individuals who vote with their feet can choose between communities that differ in the way that public goods are provided we obtain the following findings i an equilibrium always exists in which all individuals migrate to the community which uses voluntary provision ii under very robust conditions on preferences and income distribution an equilibrium exists in which all individuals migrate to the community which uses coercive provision iii interior equilibria in which collections of individuals move to both communities exist when income distribution is sufficiently polarized such equilibria are shown to be stratified richer individuals migrate to the community with voluntary provision while poorer individuals reside in the public provision community in the case where there are two types of wealth endowments existence of stratified equilibria seems to require a negative trade off between the wealth ratio of the rich to the poor and the numerical ratio of rich to poor in society

costly arbitrage evidence from closed end funds arbitrage costs lead to large deviations of prices from fundamentals using a sample of closed end funds i find that the market value of a fund is more likely to deviate from the value of its assets 1 for funds with portfolios that are difficult to replicate 2 for funds that pay out smaller dividends 3 for funds with lower market values and 4 when interest rates are high these factors are related to the magnitude of the deviation as opposed to the direction i e whether discount or premium and explain a quarter of cross sectional mispricing variation these findings are consistent with noise trader models of asset pricing

sorting equilibrium in a multi jurisdiction model abstract this paper analyzes a general model of an economy with heterogeneous individuals choosing among two jurisdictions such as towns or political parties each jurisdiction is described by its constitution where a constitution is defined as a mapping from all possible population partitions into the possibly multidimensional policy space this study is the first to establish sufficient conditions for existence of sorting equilibria in a two jurisdiction model for a policy space of an arbitrary dimension

what do we know about the risk of individual account pensions evidence from industrial countries the traditional way by which rich countries assure old age income security is through mandatory publicly financed pensions most national systems provide defined benefit pensions in which a worker s benefit is calculated based on years of coverage under the program and average wages while contributing to the system traditional systems are designed to replace a predictable and stable percentage of workers average earnings over their later careers excessive pension commitments have pushed many pay as you go pension programs toward insolvency however one reform option is to scale back traditional pensions gradually and replace them with pensions financed out of individual investment accounts a presidential commission recently outlined three reform plans to reduce benefits under the u s social security system and replace them with annuities financed out of retirement savings accounts president s commission to strengthen social security 2002 this paper examines evidence on the likely success of individual accounts in providing retirement income i use historical and simulated data on financial market performance to evaluate the market risks facing contributors to a system that is based on individual investment accounts the paper estimates the hypothetical pensions that workers in five industrialized countries could have obtained based on historical data the empirical magnitude of retirement income risks is shown to be quite large almost certainly larger than would be tolerated in most rich democracies

migration proof tiebout equilibrium existence and asymptotic efficiency abstract tiebout s basic claim was that when public goods are local competition between jurisdictions solves the free riding problem in the sense that equilibria exist and are always pareto efficient unfortunately the literature does not quite support this conjecture for finite economies one must choose between notions of tiebout equilibrium which are pareto optimal but which may be empty or which are nonempty but may be inefficient this paper introduces a new equilibrium notion called migration proof tiebout equilibrium which we argue is a natural refinement of nash equilibrium for a multijurisdictional environment we show for sufficiently large economies with homogeneous consumers such an equilibrium always exists is unique and is asymptotically pareto efficient

zombie board board tenure and firm performance we show that board tenure exhibits an inverted u shaped relation with firm value and accounting performance the quality of corporate decisions such as m a financial reporting quality and ceo compensation also has a quadratic relation with board tenure our results are consistent with the interpretation that directors on the job learning improves firm value up to a threshold at which point entrenchment dominates and firm performance suffers to address endogeneity concerns we use a sample of firms in which an outside director suffered a sudden death and find that sudden deaths that move board tenure away from toward the empirically observed optimum level in the cross section are associated with negative positive announcement returns the quality of corporate decisions also follows an inverted u shaped pattern in a sample of firms affected by the death of a director

entrepreneurial finance and innovation an introduction and agenda for future research the increasingly large role played by financial intermediaries such as venture capitalists and angels in nurturing entrepreneurial firms and in promoting product market innovation has led to great research interest in the area of entrepreneurial finance and innovation this paper introduces the special issue of the review of financial studies dedicated to entrepreneurial finance and innovation and highlights some of the promising topics for future research in this area the special issue combines papers presented at the june 2010 entrepreneurial finance and innovation efic conference which was jointly sponsored by the kauffman foundation and the review of financial studies with other related papers

voting with ballots and feet existence of equilibrium in a local public good economy abstract this paper proves a general existence theorem for equilibrium in a local public good economy with free mobility by extending greenberg and shitovitz s j econ theory46 1988 223 236 approach each jurisdiction s collective choice rule is the d majority voting rule proposed by greenberg econometrica47 1979 627 636 spillover effects of local public goods externalities due to the population distribution and snob effects are all allowed we need transitivity and completeness of preferences these assumptions are not used by greenberg and shitovitz because they do not permit consumers to move free mobility of consumers causes disconnections in consumption sets a problem addressed here journal of economic literatureclassification numbers c62 d72 h72 r13

a theory of wage dynamics a dynamic equilibrium model of long term implicit labour contracts under incomplete but symmetric information is developed workers are assumed to be risk averse and of unknown ability or productivity risk neutral firms learn as do workers about each worker s productivity by observing the worker s output over time it is shown that equilibrium contracts provide for wages which never decline with age and increase only when the worker s market value increases above his current wage in addition to characterizing the equilibrium wage contract we also derive some of its implications for the behaviour of aggregate wages across various groups of workers these implications explain some findings in the recent empirical literature on ageearnings profiles in particular our model can explain why earnings may be positively related to experience even after controlling for productivity as some empirical studies have indicated

optimal incentive contracts in the presence of career concerns theory and evidence this paper studies optimal incentive contracts when workers have career concerns concerns about the effects of current performance on future compensation we show that the optimal compensation contract optimizes total incentives the combination of the implicit incentives from career concerns and the explicit incentives from the compensation contract thus the explicit incentives from the optimal compensation contract should be strongest for workers close to retirement because career concerns are weakest for these workers we find empirical support for this prediction in the relation between chief executive compensation and stock market performance

local public goods with mobility existence and optimality of a general equilibrium abstract the existence and optimality of a general equilibrium in a model with a finite number of locations among which the continuum of individuals each individual belonging to one of a finite number of types have to choose is investigated each community finances its own production of public goods by taxes the way in which the tax burden in shared among the different types in the different regions is left arbitrary the model allows for restrictions on the mobility of either residents and or workers congestion and externalities in both production and consumption commuting costs preferences of an individual may also depend on his location as well as on the distribution of all individuals across locations

estimation and empirical properties of a firm year measure of accounting conservatism we estimate a firm year measure of accounting conservatism examine its empirical properties as a metric and illustrate applications by testing new hypotheses that shed further light on the nature and effects of conservatism the results are consistent with the measure c score capturing variation in conservatism and also predicting asymmetric earnings timeliness at horizons of up to 3 years ahead cross sectional hypothesis tests suggest firms with longer investment cycles higher idiosyncratic uncertainty and higher information asymmetry have higher accounting conservatism event studies suggest increased conservatism is a response to increases in information asymmetry and idiosyncratic uncertainty

the relation between equity incentives and misreporting the role of risk taking incentives abstract prior research argues that a manager whose wealth is more sensitive to changes in the firm s stock price has a greater incentive to misreport however if the manager is risk averse and misreporting increases both equity values and equity risk the sensitivity of the manager s wealth to changes in stock price portfolio delta will have two countervailing incentive effects a positive reward effect and a negative risk effect in contrast the sensitivity of the manager s wealth to changes in risk portfolio vega will have an unambiguously positive incentive effect we show that jointly considering the incentive effects of both portfolio delta and portfolio vega substantially alters inferences reported in prior literature using both regression and matching designs and measuring misreporting using discretionary accruals restatements and enforcement actions we find strong evidence of a positive relation between vega and misreporting and that the incentives provided by vega subsume those of delta collectively our results suggest that equity portfolios provide managers with incentives to misreport when they make managers less averse to equity risk

tobin s q and the gains from takeovers this paper analyzes the relation between takeover gains and the q ratios of targets and bidders for a sample of 704 mergers and tender offers over the period 1972 1987 target bidder and total returns are larger when targets have low q ratios and bidders have high q ratios the relation is strengthened after controlling for the characteristics of the offer and the contest this evidence confirms the results of the work by lang stulz and walkling and shows that their findings also hold for mergers and after controlling for other determinants of takeover gains in a recent paper lang stulz and walkling lsw 1989 document that the abnormal returns in tender offers are related to the tobin s q ratios of the targets and the bidders in particular they find that target bidder and total returns are higher when takeover targets have high q ratios and bidders have low q ratios where one is used as a cutoff point to separate high q firms from low q firms in fact bidders with high q ratios have significant positive abnormal returns when they engage in a takeover while bidders with low q ratios have significant negative abnormal returns the best takeovers in terms of value creation are those where a high q firm takes over a low q firm the opposite scenario holds for the worst case takeovers low q firms taking over high q firms if q is interpreted as a measure of managerial performance these findings imply that better performing firms also make better acquisitions and that more value can be created from taking over poorly performing companies while the results of lsw are insightful they leave a number of questions unanswered their sample consists only of tender offers several studies have documented that the returns to targets in mergers are smaller than those in tender offers see jensen and ruback 1983 and huang and walkling 1987 it would therefore be useful to see whether the lsw 1989 results hold for a larger sample which includes both mergers and tender offers previous research has also shown that the characteristics of the takeover hostile versus friendly and single versus multiple bidder the form of payment cash versus securities the time period before 1968 1968 1980 1981 and later and the relative size of target and bidder are important determinants of the magnitude of takeover gains and their distribution

weakly democratic regular tax equilibria in a local public goods economy with perfect consumer mobility in this paper we study the existence of equilibria in a local public goods economy which has the following structure there are a finite number of geographical regions each region has a government which provides public goods locally by buying private goods inputs on competitive markets and transforming these inputs into outputs of public goods by using a convex technology the local public goods are pure in the sense that all the local residents consume the total produced with no spillovers to other regions each regional government raises revenue from the residents of its region to cover the costs of the public goods it provides the local governments are assumed to be weakly democratic in the sense that no public sector proposal that is a vector of public good provisions and a tax scheme to pay for it will be enacted for which there exists an alternative proposal which is unanimously preferred by the local residents note that it is not being assumed that unanimity is a necessary condition for a public sector proposal to be enacted private goods are produced by price taking profit maximizing producers using convex technologies and are traded across regions a continuum of price taking utility maximizing consumers who are perfectly mobile across regions treat parametrically the public sector proposals of the various local governments in deciding where to live there are a finite number of different types of consumers with type defined by a consumer s preferences initial endowments and share of private sector profits a feasible allocation is a specification of a partition of the consumers among the regions a vector of technically feasible public good provisions and an associated vector of private good inputs used in its production for

discussion of are executive stock options associated with future earnings abstract hanlon rajgopal and shevlin conclude that grant of stock options to executives is associated with a positive impact on future operating performance this discussion comment examines the impact of endogeneity model structure and the choice of a benchmark model on this conclusion while some results indicate that there is a position relation between stock option grants and operating performance alternative econometric approaches produce distinctly different results

world income components measuring and exploiting risk sharing opportunities a method is constructedfor decomposing the variance of changes in incomes in the world into components to indicate the most important risk sharing opportunities among people of the world a constant absolute risk premium carp model an intertemporal general equilibrium model of the world is presented to permit optimal contract design for a contract designer maximizing a social welfare function the optimal contracts maximize the equilibrium world real interest rate securities are defined in terms of eigenvectors of a transformed variance matrix the method is applied using penn world table data on the g 7 countries 1950

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

strong tiebout equilibrium under restricted preferences domain abstract we investigate the existence and give a partial characterization of a strong tiebout equilibrium which consists of an endogenously formed partition of the individuals into disjoint jurisdictions with each jurisdiction producing and financing its own public goods and moreover there exists no group of individuals who can all benefit by establishing their own community in particular no single individual finds it desirable to migrate from his equilibrium jurisdiction the existence proof makes use of the notion of consecutive games which we introduce and show that for such games there always exists a partition with a nonempty core

competition among institutions abstract economic theory offers two different approaches to the analysis of group formation and the role of institutions general equilibrium approach explores the influence of the economic environment on formation of coalitions game theory explores the influence of institutional rules on equilibrium outcomes we introduce an integrative approach an institution s policy depends on its membership while its membership depends on the policies of all the institutions we present three distinct mathematical approaches to these models highlighting the algebraic nature of the question of existence of equilibrium our apparatus cover many economic and political environments including cases with multiple dimensions and multiple institutions journal of economic literature classification numbers c62 d50 d71 d72 h11 h40 r13 r53

intergenerational risk sharing and fiscal policy abstract risk sharing implications of alternative fiscal policies are compared in a stochastic production economy with overlapping generations ex ante efficiency is shown to be achievable with optimal transfers regardless of distributional concerns for crra preferences stylized real world policies notably safe debt and safe pensions are found inefficient in the direction of imposing not enough productivity risk on retirees and too much on future generations safe transfers can be rationalized as efficient if preferences display age increasing risk aversion such as habit formation the ubiquity of safe transfers suggests that governments treat the young as more risk tolerant than older cohorts

the patent paradox revisited an empirical study of patenting in the u s semiconductor industry 1979 1995 we examine the patenting behavior of firms in an industry characterized by rapid technological change and cumulative innovation recent survey evidence suggests that semiconductor firms do not rely heavily on patents to appropriate returns to r d yet the propensity of semiconductor firms to patent has risen dramatically since the mid1980s we explore this apparent paradox by conducting interviews with industry representatives and analyzing the patenting behavior of 95 u s semiconductor firms during 1979 1995 the results suggest that the 1980s strengthening of u s patent rights spawned patent portfolio races among capital intensive firms but it also facilitated entry by specialized design firms

wealth accumulation and the propensity to plan why do similar households end up with very different levels of wealth we show that differences in the attitudes and skills with which they approach e nancial planning are a signie cant factor we use new and unique survey data to assess these differences and to measure each household s propensity to plan we show that those with a higher such propensity spend more time developing e nancial plans and that this shift in planning is associated with increased wealth these e ndings are consistent with broad psychological evidence concerning the benee cial impacts of planning on goal pursuit those with a high propensity to plan may be better able to control their spending and thereby achieve their goal of wealth accumulation we e nd direct evidence supporting this effortful self control channel in the very strong relationship we uncover between the propensity to plan and budgeting behavior

assessing empirical research in managerial accounting a value based management perspective this paper applies a value based management framework to critically review empirical research in managerial accounting this framework enables us to place the exceptionally diverse set of managerial accounting studies from the past several decades into an integrated structure our synthesis highlights the many consistent results in prior research identifies remaining gaps and inconsistencies discusses common methodological and econometric problems and suggests fruitful avenues for future managerial accounting research

a critique of tiebout s theory of local public expenditures the last section of this paper presents a rigorous version of tiebout s theory of local public goods it is shown that equilibria exist and are pareto optimal this rigorous theory follows closely the more rigorous part of tiebout s work this rigorous theory makes a number of very special assumptions which make local public goods essentially private the body of this paper presents a series of examples which show that if one tries to generalize the rigorous version of tiebout s theory in a number of interesting directions then equilibria may no longer exist or may not be pareto optimal the conclusion is that tiebout s idea does not lead to a satisfactory general theory of local public goods the goal of this paper is to point out that tiebout s notion of equilibrium with local governments does not have the nice properties of general competitive equilibrium except under very restrictive assumptions tiebout 39 suggested that there are competitive forces which tend to make local governments allocate resources in a pareto optimal fashion consumers choose to live in those towns with the mix of taxes and public goods they prefer local governments choose this mix so as to attract inhabitants this idea may seem intriguing for it suggests that the invisible hand solves an important part of samuelson s perplexing public goods problem 32 tiebout in fact makes an argument which is nearly rigorous i give a rigorous version of his argument at the end of the paper however in this rigorous version so many restrictive assumptions are made that public goods become essentially private in the body of the paper i give a series of examples with which i try to convince the reader that one is forced to adopt tiebout s restrictive assumptions the idea is that if one changes any of his assumptions then either equilibria may not exist or may not be pareto optimal my examples are presented in the context of a general class of tiebout models i consider several subclasses one of which is the special case considered by tiebout in each of the subclasses except that considered by tiebout i give a counterexample either to the existence of equilibrium or to its pareto optimality the subclasses are so chosen that the difficulties they reveal would be shared by any reasonable tiebout model which differed from his special case i believe that my examples controvert tiebout s suggestion 39 last paragraph that his theory compares favorably with competitive equilibrium theory most of the examples in this paper have already appeared in the literature i cite related work as i go along what is new here is that i assemble the examples in a unified argument

estimating the value of employee stock option portfolios and their sensitivities to price and volatility the costs associated with compiling data on employee stock option portfolios is a substantial obstacle in investigating the impact of stock options on managerial incentives accounting choice financing decisions and the valuation of equity we present an accurate method of estimating option portfolio value and the sensitivities of option portfolio value to stock price and stock return volatility that is easily implemented using data from only the current year s proxy statement or annual report this method can be applied to either executive stock option portfolios or to firm wide option plans in broad samples of actual and simulated ceo option portfolios we show that these proxies capture more than 99 of the variation in option portfolio value and sensitivities sensitivity analysis indicates that the degree of bias in these proxies varies with option portfolio characteristics and is most severe in samples of ceos with a large proportion of out of the money options however the proxies explanatory power remains above 95 in all subsamples

social security and individual accounts as elements of overall risk sharing the widespread public and political impetus in the united states and elsewhere to revamp social security to incorporate some form of individual accounts creates a time of opportunity it is a time when people want to see the better exploitation of the available trade off between risk and return and a time to reconsider the foundations of the social security system so that it can much better serve its intended purpose as a manager of risks as i argue in my new book the new financial order risk in the 21st century shiller 2003 the time when we redesign social security ought to be a time when we carefully consider the fundamental intergenerational risk management problem and define choices in individual accounts that reflect the true problem it is also a time when we must make creative use of insights from behavioral economics that have emerged over the years finally it is a time for an expanded exploitation of our new electronic information technology we should not miss this opportunity this means we must work now toward solving a complex constrained optimization problem where the objective is to maximize a social welfare function involving all generations and the constraints reflect the varying degrees of individual optimization ability psychological underpinnings of human behavior and modem information technology

does endogenous formation of jurisdictions lead to wealth stratification conditions under which endogenous processes of jurisdiction formation entail wealth stratification are examined in a model where unequally wealthy households with identical preferences form jurisdictions in order to produce a public good financed by proportional taxation we define a stable jurisdiction structure to be a partition of the households into jurisdictions that is immune to individual deviations we define a jurisdiction structure to be wealth stratified when each jurisdiction is composed of households who form an interval with respect to the ordering of their wealth we show that a necessary and sufficient condition for the stratification of any stable jurisdiction structure is for the individual preferences for the public and the private good to exhibit a relation of gross substitutability complementarity between the public good and the private good that is independent from prices and wealth

on the dynamic selection of mechanisms for provision of public projects abstract how do individuals spatial decisions affect the institutions for public goods provision over time this paper describes a dynamic model in which the provision mechanism for a public project is itself the object of locational choice of individuals individuals in an ongoing society must choose between a location with a majority rule mechanism and one with a voluntary contribution mechanism each mechanism determines a funding decision for a local public project which is repeated over time generations of individuals asynchronously supercede their parents creating an entry exit process that allows individuals with possibly different beliefs to enter society a self confirming equilibrium sce belief process describes an evolution of beliefs in this society consistent with a self confirming equilibrium fudenberg and levine 1993 of the repeated location provision game it is shown that the process with belief mutation as new individuals enter society results in a globally absorbing state in which the majority rule mechanism is the unique survivor of the two

an analysis of the stock price reaction to sudden executive deaths implications for the managerial labor market abstract certain characteristics of managerial employment arrangements and of the managerial labor market make shareholder wealth dependent on an executive s continued employment these wealth effects are investigated by examining the common stock price reaction to unexpected deaths of senior corporate executives abnormal stock price changes are documented for a sample of fifty three events these abnormal stock price changes are associated with the executive s status as a corporate founder and with measures of the executive s talents and decision making responsibility and of the transaction costs associated with renegotiating or terminating the employment agreement

the consequences of labour mobility for redistribution tax vs transfer competition abstract in a context where both the poor and the rich are imperfectly mobile this paper compares the nash equilibrium levels of income redistribution from the rich to the poor when jurisdictions compete either in taxes in transfers or both in taxes and transfers although taxes and transfers are linked through the budget balanced requirement the analysis reveals intriguing differences indeed it turns out that transfer competition results in much less redistribution than tax competition while tax transfer competition involves an intermediate level of redistribution in each approach the mobility of the rich is detrimental to redistribution and an increase in the dependency ratio reduces taxes concerning the effect of the mobility of the poor these approaches reach opposite conclusions that is the mobility of the poor is beneficial to redistribution under tax competition but reduces redistribution under transfer competition

the changing of the boards the impact on firm valuation of mandated female board representation in 2003 a new law required that 40 of norwegian firms directors be women at the time only 9 of directors were women we use the prequota cross sectional variation in female board representation to instrument for exogenous changes to corporate boards following the quota we find that the constraint imposed by the quota caused a significant drop in the stock price at the announcement of the law and a large decline in tobin s q over the following years consistent with the idea that firms choose boards to maximize value the quota led to younger and less experienced boards increases in leverage and acquisitions and deterioration in operating performance copyright 2012 oxford university press

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

the balance between defined benefit defined contribution and state provision we examine the possible consequences of the increasing shift from defined benefit to defined contribution arrangements for private pensions whilst much analysis has focused on the possible distribution of investment and job tenure risk we point out the additional role for issues relating to adverse selection and to retirement incentives these issues are illustrated using empirical evidence from the united kingdom where the fact that private pensions are an alternative as opposed to a supplement to earnings related state pension provision makes the effects particularly salient jel i38 j32 d91

existence of a spatial equilibrium we prove the existence of a competitive equilibrium in a simple canonical model of spatial economics we emphasize the single difficulty introduced by the use of a continuum of agents to convexify the fundamental locational nonconvexity individual consumption bundles are not bounded above by the aggregate boundedness of initial resources

entrenchment governance and the stock price reaction to sudden executive deaths abstract to study managerial entrenchment i use the stock price reaction to unexpected senior executive deaths if a highly effective manager dies unexpectedly the stock price reaction should be negative if however death removes an entrenched manager when the board would or could not the stock price reaction should be positive while individually age and tenure only weakly correlate with the stock price reaction to a sudden death the reaction is strongly positive 6 8 if 1 the executive s tenure exceeds 10 years and 2 abnormal stock returns over the last three years are negative

it pays to have friends abstract currently a director is classified as independent if he or she has neither financial nor familial ties to the ceo or to the firm we add another dimension social ties using a unique data set we find that 87 of boards are conventionally independent but that only 62 are conventionally and socially independent furthermore firms whose boards are conventionally and socially independent award a significantly lower level of compensation exhibit stronger pay performance sensitivity and exhibit stronger turnover performance sensitivity than firms whose boards are only conventionally independent our results suggest that social ties do matter and that consequently a considerable percentage of the conventionally independent boards are substantively not