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on Business Economics |
| By: | Danthine, Jean-Pierre; Donaldson, John B |
| Abstract: | We reexamine the issue of executive compensation within a general equilibrium production context. Intertemporal optimality places strong restrictions on the form of a representative manager's compensation contract, restrictions that appear to be incompatible with the fact that the bulk of many high-profile managers' compensation is in the form of various options and option-like rewards. We therefore measure the extent to which a convex contract alone can induce the manager to adopt near-optimal investment and hiring decisions. To ask this question is essentially to ask if such contracts can effectively align the stochastic discount factor of the manager with that of the shareholder-workers. We detail exact circumstances under which this alignment is possible and when it is not. |
| Keywords: | business cycles; convex contracts; corporate governance; executive compensation; optimal contracting; stock options |
| JEL: | E32 E44 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cpr:ceprdp:6890&r=bec |
| By: | Carola Frydman; Raven E. Saks |
| Abstract: | We analyze the long-run trends in executive compensation using a new panel dataset of top executives in large publicly-held firms from 1936 to 2005, collected from corporate reports. This historic perspective reveals several surprising new facts that conflict with inferences based only on data from the recent decades. First, the median real value of compensation was remarkably flat from the end of World War II to the mid-1970s, even during times of rapid economic expansion and aggregate firm growth. This finding contrasts sharply with the steep upward trajectory of pay over the past thirty years, which coincided with a period of similarly large increases in aggregate firm size. A second surprising finding is that the sensitivity of an executive's wealth to firm performance was not inconsequentially small for most of our sample period. Thus, recent years were not the first time when compensation arrangements served to align managerial incentives with those of shareholders. Taken together, the long-run trends in the level and structure of compensation pose a challenge to several common explanations for the widely-debated surge in executive pay of the past several decades, including changes in firms' size, rent extraction by CEOs, and increases in managerial incentives. |
| JEL: | G30 J33 M52 N82 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14145&r=bec |
| By: | Ulrike Malmendier; Geoffrey Tate |
| Abstract: | Compensation, status, and press coverage of managers in the U.S. follow a highly skewed distribution: a small number of 'superstars' enjoy the bulk of the rewards. We evaluate the impact of CEOs achieving superstar status on the performance of their firms, using prestigious business awards to measure shocks to CEO status. We find that award-winning CEOs subsequently underperform, both relative to their prior performance and relative to a matched sample of non-winning CEOs. At the same time, they extract more compensation following the award, both in absolute amounts and relative to other top executives in their firms. They also spend more time on public and private activities outside their companies, such as assuming board seats or writing books. The incidence of earnings management increases after winning awards. The effects are strongest in firms with weak governance, even though the frequency of obtaining superstar status is independent of corporate governance. Our results suggest that the ex-post consequences of media-induced superstar status for shareholders are negative. |
| JEL: | D21 D23 G14 G34 J33 M52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14140&r=bec |
| By: | Joseph Clougherty (Wissenschaftszentrum Berlin (WZB) and CEPR-London MP Research Unit, Reichpietschufer 50, 10785 Berlin, Germany; clougherty@wzb.eu); Tomaso Duso (Wissenschaftszentrum Berlin (WZB) and CEPR-London MP Research Unit, Reichpietschufer 50, 10785 Berlin, Germany; duso@wzb.eu) |
| Abstract: | It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert- identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ‘future acquisition probability’ does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type. |
| Keywords: | rivals, mergers, acquisitions, event-study |
| JEL: | G14 G34 L22 M20 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:239&r=bec |
| By: | Thomas Giebe (Thomas Giebe, Department of Economics, Economic Theory I, Humboldt University Berlin, Spandauer Stra_e 1, D-10178 Berlin, Germany, e-mail: thomas.giebe@wiwi.huberlin.de); Oliver Gürtler (Oliver Gürtler, Department of Economics, BWL II, University of Bonn, Adenauerallee 24-42, 53113 Bonn, Germany, e-mail: oliver.guertler@uni-bonn.de) |
| Abstract: | We consider a situation where an agent's effort is monitored by a supervisor who cares for the agent's well-being. This is modeled by incorporating the agent's utility into the utility function of the supervisor. The first-best solution can be implemented even if the supervisor's preferences are unknown. The corresponding optimal contract is similar to what we observe in practice: The supervisor's wage is constant and independent of his report. It induces one type of supervisor to report the agent's performance truthfully, while all others report favorably independent of performance. This implies that overstated performance (leniency bias) maybe the outcome of optimal contracts under informational asymmetries. |
| Keywords: | Subjectiveperformanceevaluation,leniency,supervisor,privateinformation |
| JEL: | D82 D86 J33 M52 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:trf:wpaper:237&r=bec |
| By: | Oxelheim, Lars (Research Institute of Industrial Economics (IFN)); Wihlborg, Clas (Chapman University and Copenhagen Business School); Zhang, Jianhoa (University of Göteborg) |
| Abstract: | Macroeconomic fluctuations affect corporations’ performance through demand and cost conditions. Incentive effects of performance-based compensation schemes for management may be weakened or biased by macroeconomic influences if management is unable to forecast macroeconomic fluctuations or unable to adjust operations in response to changes in macroeconomic conditions. In this paper we analyze the impact of macroeconomic, industry and firm-specific factors on salaries and bonus of CEOs in 131 Swedish corporations during the period 2001–2006. A distinction is made between anticipated and unanticipated macroeconomic fluctuations. The macroeconomic influences on performance and compensation can be expected to vary from firm to firm in terms of magnitude of effects, as well as in terms of relevant macroeconomic variables. The estimates obtained in this paper refer to the average impact across the sample of firms. We find that the average Swedish CEOs’ compensation is explained to a substantial extent by macroeconomic factors; less so by unanticipated factors alone. |
| Keywords: | Executive Compensation; Macroeconomic Factors; Cash Compensation |
| JEL: | L14 L16 M14 M21 M52 |
| Date: | 2008–04–21 |
| URL: | http://d.repec.org/n?u=RePEc:hhs:iuiwop:0746&r=bec |
| By: | Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich) |
| Abstract: | In this study we investigated the determinants (a) of the propensity of Swiss firms to train apprentices and (b) of the intensity of apprentice training as measured by the employment share of apprentices. Innovation, firm age and competition conditions on the product market are possible determining factors that are especially emphasized in this investigation. In a further step, we analyzed the impact of apprentice training on labour productivity when apprentice training is considered as an additional production factor in the framework of a production function. We found that the skill composition of the employment, innovation activities, firm age, labour costs, capital intensity, and competitive pressures all play a positive or negative role, even if not at the same extent, in determining the propensity and/or intensity of apprentice training. A further finding was that training propensity and/o training intensity correlate negatively with labour productivity. |
| Keywords: | start-ups, training, innovation, firm age |
| JEL: | J24 O30 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-198&r=bec |
| By: | Joseph A. Clougherty; Tomaso Duso |
| Abstract: | It is commonly perceived that firms do not want to be outsiders to a merger between competitor firms. We instead argue that it is beneficial to be a non-merging rival firm to a large horizontal merger. Using a sample of mergers with expert-identification of relevant rivals and the event-study methodology, we find rivals generally experience positive abnormal returns at the merger announcement date. Further, we find that the stock reaction of rivals to merger events is not sensitive to merger waves; hence, ‘future acquisition probability’ does not drive the positive abnormal returns of rivals. We then build a conceptual framework that encompasses the impact of merger events on both merging and rival firms in order to provide a schematic to elicit more information on merger type. <br> <br> <i>ZUSAMMENFASSUNG - (Die Wirkung von horizontalen Zusammenschlüssen auf Wettbewerber: Der Nutzen einer Außenseiterposition bei Fusionen) <br>Es ist gemeinhin bekannt, dass Unternehmen nicht Außenseiter einer Fusion zwischen eigenen Wettbewerbern sein wollen. In dieser Arbeit zeigen wir, dass es für Unternehmen durchaus vorteilhaft sein kann, sich an einem großen horizontalen Zusammenschluss nicht zu beteiligen. Anhand einer Datenbank von großen Fusionen, in denen die relevanten Wettbewerber der fusionierenden Unternehmen von Experten der Europäischen Kommission identifiziert worden sind, und Mithilfe einer Ereignisstudienmethode, bestätigen wir empirisch, dass Wettbewerber durchschnittlich positive abnormale Gewinne bei der Ankündigung eines Zusammenschlusses erzielen. Darüber hinaus stellen wir fest, dass die Reaktion der Aktienkurse von Konkurrenten bei der Ankündigung eines Zusammenschlusses nicht anfällig für Fusionswellen ist, und dass die abnormalen Gewinne nicht von der "künftigen Firmenübernahmewahrscheinlichkeit" getrieben sind. Schließlich wird in der Studie ein konzeptioneller Rahmen entwickelt, der die Auswirkungen der Fusion sowohl auf die fusionierenden Unternehmen und als auch auf die Wettbewerber zusammenfasst, um die Art des Zusammenschlusses besser identifizieren zu können.<i> |
| Keywords: | Rivals, Mergers, Acquisitions, Event-Study |
| JEL: | G34 G14 M20 L22 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:wzb:wzebiv:spii2008-17&r=bec |
| By: | David Rahman (Department of Economics, University of Minnesota); Ichiro Obara (Department of Economics, University of Minnesota) |
| Abstract: | By allocating dierent information to team members, secret contracts can provide better incentives to perform with an intuitive organizational design. For instance, they may help to monitor monitors, and appoint secret principals. Generally, secret contracts highlight a rich duality between detection and enforcement with linear transfers. On the one hand, disobedient deviations must be detectable to enforce a given outcome, but dierent behavior may be used to detect dierent deviations. On the other hand, disobedient deviations must be attributable, i.e., some individual can be identied as innocent, to provide incentives with budget balance. |
| Keywords: | secret contracts, partnerships, duality, private monitoring. |
| JEL: | D21 D23 D82 |
| Date: | 2008–06–26 |
| URL: | http://d.repec.org/n?u=RePEc:min:wpaper:2008-3&r=bec |
| By: | Steven J. Davis; R. Jason Faberman; John C. Haltiwanger; Ian Rucker |
| Abstract: | We develop and implement a method to improve estimates of worker flows and job openings based on the Job Openings and Labor Turnover Survey (JOLTS). Our method involves reweighting the cross-sectional density of employment growth rates in JOLTS to match the corresponding density in the comprehensive Business Employment Dynamics (BED) data. To motivate our work, we compare JOLTS to other data sources and document large discrepancies with respect to aggregate employment growth, the magnitude of worker flows, and the cross-sectional density of establishment growth rates. We also discuss issues related to JOLTS sample design and nonresponse corrections. Our adjusted statistics for hires and separations exceed the published statistics by about one-third. The adjusted layoff rate is more than 60 percent greater than the published layoff rate. Time-series properties are also affected. For example, hires exhibit more volatility than separations in the published statistics, but the reverse holds in the adjusted statistics. The impact of our adjustment methodology on estimated job openings is more modest, raising the vacancy rate by about 8 percent. |
| JEL: | C82 J63 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:nbr:nberwo:14137&r=bec |
| By: | Fernando Munoz-Bullon; Maria Jose Sanchez-Bueno |
| Abstract: | The objective of this study is to examine the effect of downsizing on corporate performance, considering a sample of manufacturing firms drawn from the Spanish Survey of Business Strategies during the 1993- 2005 period. No significant differences in post-downsizing performance arise between companies which downsize and those that do not. Likewise, we find that substantial workforce reductions through collective dismissals do not either lead to improved performance levels. Downsizing, therefore, may not be a way for managers to increase performance, particularly in a context like the Spanish one, where the labour market is characterized by a high protection of employees’ rights and substantial contract termination costs. |
| Keywords: | Downsizing, Corporate performance, Spanish labour market |
| JEL: | J21 J65 |
| Date: | 2008–06 |
| URL: | http://d.repec.org/n?u=RePEc:cte:wbrepe:wb083007&r=bec |
| By: | Spyros Arvanitis (KOF Swiss Economic Institute, ETH Zurich); Tobias Stucki (KOF Swiss Economic Institute, ETH Zurich) |
| Abstract: | This study is based on data a cohort of Swiss firms that were founded in 1996/97. In the year 2000 data were collected by means of a postal survey among those firms, which still existed by that time. In 2003 and 2006 two further surveys were conducted among the participants of the respective last study. In this study we analyzed, firstly, the determinants of the propensity to train apprentices of new firms and how they change with increasing firm age. Secondly, we investigated how a firm’s training propensity correlated with its labour productivity. To this end, we specified an equation for training propensity and an equation for labour productivity, which included as an additional production factor the endogenized propensity to train apprentices. |
| Keywords: | start-ups, training, innovation, firm age |
| JEL: | J24 O30 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:kof:wpskof:08-199&r=bec |
| By: | Zhou, Jidong |
| Abstract: | This paper studies the implications of consumer reference dependence in market competition. If consumers take some product (e.g., the first product they have considered) as the reference point in evaluating others and exhibit loss aversion, then the more "prominent" firm whose product is taken as the reference point by more consumers will randomize its price over a high and a low one. All else equal, this firm will on average earn a larger market share and a higher profit than its rival. The welfare impact is that consumer reference dependence could harm firms and benefit consumers by intensifying price competition. Consumer reference dependence will also shape firms' advertising strategies and quality choices. If advertising increases product prominence, ex ante identical firms may differentiate their advertising intensities. If firms vary in their prominence, the less prominent firm might supply a lower-quality product even if improving quality is costless. |
| JEL: | D11 L13 M37 D43 |
| Date: | 2008–05 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9370&r=bec |
| By: | Shchetinin, Oleg |
| Abstract: | The paper studies the impact of altruism on Agent's motivation in the career concerns model. The main result is that higher altruism can decrease effort though conventional wisdom suggests the opposite should always the case. The key for the result is the distinction between current and anticipated altruism. The current altruism stimulates the Agent because it makes him partially internalize the Principal's benefit from output. More subtle, the anticipated altruism weakens effort because it lessens career concerns. The paper contributes to the literature on interaction between intrinsic and extrinsic motivation. It gives an example when intrinsic motivator (altruism) lessens extrinsic motivation (career concerns). The model has a number of other interesting features. It gives an example of winner's blessing. It shows that if the worker pushes himself too hard trying to pretend more skilled, it can hinder altruistic relationship. Whereas if the worker shirks, his laziness is safe for establishing altruistic relation in the future. The natural interpretation of the model is labor contract between friends, other applications are also discussed. |
| Keywords: | career concern; altruism; labor contract; intrinsic motivation |
| JEL: | D86 D64 M50 |
| Date: | 2008–07 |
| URL: | http://d.repec.org/n?u=RePEc:pra:mprapa:9414&r=bec |
| By: | Pot Erik; Peeters Ronald; Peters Hans; Vermeulen Dries (METEOR) |
| Abstract: | We analyze whether noncooperative collusive equilibria are harder to sustain when individual demand levels are not fixed but are able to fluctuate. To do this, we extend a Bertrand type model of price competition to allow for fluctuating market shares when prices are equal. We find that, the larger the market share fluctuations may be, the higher the discount factor should be to sustain a collusive equilibrium in trigger strategies. The intuition behind this is fairly straightforward. When individual demand in the collusive state is suddenly low, the gains from collusion go down. Moreover, the firm with the low demand can capture a larger share of the market by deviating from the collusive strategy. The incentive to deviate therefore becomes larger when the individual market share decreases. We also look at the existence of a specific type of semi-collusive equilibrium when individual market shares are either common knowledge or private knowledge. We find that there exist equilibria in which competitive periods (price wars) occur with probability 1 and on the equilibrium path. |
| Keywords: | mathematical economics; |
| Date: | 2008 |
| URL: | http://d.repec.org/n?u=RePEc:dgr:umamet:2008017&r=bec |