Jeffrey L. Coles

University of Utah | UOU · Department of Finance

Many of the events that trigger clawback provisions are associated with risky corporate policies and variable performance outcomes. We propose and test the hypothesis that clawback provisions motivate managers to reduce firm risk. Panel ordinary least squares, general method of moments with instrumental variables, and propensity square matching mod...

We empirically examine the effects of index investing using predictions derived from a Grossman-Stiglitz framework. An exogenous increase in index investing leads to lower information production as measured by Google searches, EDGAR views, and analyst reports, yet price informativeness remains unchanged. These findings are consistent with an equili...

We empirically evaluate 20 prominent contributions across a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and apply a single, simple econometric method, the connected-groups approach of Abowd et al. to appraise the extent to which prevailing empirical specifications explain variation of the depen...

Using a novel empirical approach and newly available administrative data on US tax filings, we estimate the corporate elasticity of taxable income, decompose the elasticity into economic responses versus other tax-motivated “accounting” transactions, and determine how responsiveness varies depending on accounting method, firm size, and interest rat...

We examine the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining executive compensation incentives and firm policy, risk, and performance. First, we decompose executive incentives into time-variant and time-invariant firm and manager components. Manager fixed effects supply 73% (60%) of explain...

The usage of performance-vesting (p-v) equity awards to top executives in large U.S. companies has grown from 20 to 70 percent from 1998 to 2012. We measure the effects of p-v provisions on value, delta, and vega of equity-based compensation. We find large differences in the value of p-v awards reported in company disclosures versus economic value....

We empirically assess industry tournament incentives for CEOs, as measured by the compensation gap between a CEO at one firm and the highest-paid CEO among similar (industry, size) firms. We find that firm performance, firm risk, and the riskiness of firm investment and financial policies are positively associated with the external industry pay gap...

Using data that includes specific contractual details of Relative Performance Evaluation (RPE) contracts granted to executives for 1,833 firms for the period 1998 to 2012, we develop new methods to characterize RPE awards and measure their value and incentive properties. The frequency in the use of these awards has grown over time with 37% of the f...

This paper examines the relative importance of observed and unobserved firm- and manager-specific heterogeneities in determining the primary aspects of contract design and the implications of thee associated incentives for firm policy, risk, and performance. We focus on the sensitivity of managerial wealth to stock price (delta) and the sensitivity...

Based on detailed compensation data for all named executives in 1,833 large U.S. firms over the period 1998-2012, we find that performance-vesting (p-v) is rapidly displacing previously dominant time-vesting (t-v) awards and is now prevalent in equity awards granted to corporate executives. We examine the economic determinants of usage and choice o...

In response to recent requests from academics and practitioners, this note addresses the data and program we use in our published articles on executive compensation and incentives. First, we detail our methodology for the calculation of delta (pay-performance sensitivity), vega (risk-taking incentives), and firm-specific wealth (inside equity) for...

In a comprehensive sample of company-adopted clawback or “recoupment” provisions for S&P 1,500 firms, reported usage climbs over the decade from less than 1% in 2000 to almost 50% in 2011 (70% for S&P 500 firms). Firms are more likely to adopt a clawback provision when: there is prior executive malfeasance at the firm; malfeasance is harder to dete...

We introduce and empirically assess industry tournament incentives for CEOs. The measures we develop for the size of the tournament prize all derive from the difference in pay between the CEO at her firm and the highest-paid CEO among similar competing firms. Based on GMM with instrumental variables, we find that this external pay gap is reliably p...

While the fraction of independent directors has been widely used as a proxy for monitoring effectiveness of the board, there are no clear-cut measures that capture the advising effectiveness of the board. We develop and validate two new measures of board advising: (i) per-outside-director advising quality; and (ii) aggregate board advising capabili...

This paper presents a parsimonious, structural model that isolates primary economic determinants of the level and dispersion of managerial ownership, firm scale, and performance and the empirical associations among them. In particular, variation across firms and through time of estimated productivity parameters for physical assets and managerial in...

We empirically evaluate 20 prominent contributions to a broad range of areas in the empirical corporate finance literature. We assemble the necessary data and then apply a single, simple econometric method, the connected-groups approach of Abowd, Karmarz, and Margolis (1999), to appraise the extent to which prevailing empirical specifications expla...

We propose a new measure to capture the extent of co-option of the board by the CEO and relate that measure to corporate outcomes. Based on the notion that CEOs are at least implicitly involved in the selection of new directors, we define Co-option as the proportion of the board comprised of directors who joined the board after the CEO assumed offi...

We assemble a sample of 983 equity-based awards that include either an accelerated- or a contingent-vesting provision tied to firm performance and explore the frequency, contractual nature, usage, and implications of such awards. We find that performance-vesting (p-v) provisions specify meaningful performance hurdles and provide significant incenti...

LTW (2008) examine firms withdrawing from the SEC reporting system but continuing to trade on Pink Sheets. The paper finds that Sarbanes-Oxley increased the propensity of firms to go dark but, counter to conventional wisdom, had no significant effect on the rate of going-private transactions. Agency costs, as well as poor growth opportunities, prox...

We specify a simple structural model to isolate the economic determinants of managerial ownership and board structure in a value-maximizing contracting environment. The optimal firm size, level of managerial ownership, and the proportion of outsiders on the board is jointly determined by the relative importance of the three productivity parameters...

This paper reexamines the relation between firm value and board structure. We find that complex firms, which have greater advising requirements than simple firms, have larger boards with more outside directors. The relation between Tobin's Q and board size is U-shaped, which, at face value, suggests that either very small or very large boards are o...

We develop a measure of board co-option - the proportion of directors who joined the board after the CEO assumed office - and analyze whether this measure captures the extent to which the CEO can exert control over the board. We find that the sensitivity of CEO turnover to performance decreases in board co-option. CEO pay and pay hikes increase wit...

We investigate market behavior in a setting where managerial incentives to manipulate earnings and market price should be apparent ex ante to market participants. We find evidence of abnormally low discretionary accruals in the period following announcements of cancellations of executive stock options up to the time the options are reissued. Nevert...

We provide empirical evidence of a strong causal relation between managerial compensation and investment policy, debt policy, and firm risk. Controlling for CEO pay-performance sensitivity (delta) and the feedback effects of firm policy and risk on the managerial compensation scheme, we find that higher sensitivity of CEO wealth to stock volatility...

We address the practical question of whether investors and researchers are likely to make invalid inferences about fund manager performance when using the wrong model and/or benchmark. We consider three well-known models, those of Jensen (1968), Treynor and Mazuy (1966), and Henriksson and Merton (1981), and two commonly used timing benchmarks, the...

Existing evidence on the value of independent analysts' opinions is inconclusive. Despite the various potential conflicts of interest analysts face, stock prices tend to move in the same direction as analyst recommendations. We shed new light on the informational role of analysts through use of an independent source of evidence - individual insider...

This paper re-examines (1) the relation between firm value and board structure and (2) the factors associated with cross-sectional variation in board structure. Conventional wisdom and existing empirical research suggest that firm value decreases as the size of the firm's board increases, and as the fraction of insiders on the board increases. In t...

This paper examines the implications for mutual fund performance measurement of two likely sources of specification error. We compare three well-known models, those of Jensen (1968), Treynor and Mazuy (1966), and Henriksson and Merton (1981), and two commonly-used timing benchmarks, the S&P 500 index and CRSP value-weighted index. The practical que...

We provide evidence that firms reprice out-of-the-money executive stock options in order to realign managerial incentives. A sharp decline in stock price, by reducing the sensitivity of executive pay to firm performance (delta) and, in many cases, increasing sensitivity of executive pay to stock-return volatility (vega), can cause managerial incent...

We construct a large sample of both private and public firms from a broad set of industries to provide a direct comparison of efficiency, profitability, and incentive alignment. We find that operating profit scaled by sales and net profit to sales in private firms are less than half those in public firms. Moreover, we find no evidence that CEO turn...

We examine the relation between a board's decision to reject antitakeover provisions of Pennsylvania Senate Bill 1310 and subsequent labor market opportunities of those same board members. Compared to directors retaining all provisions, directors rejecting all protective provisions of SB1310 are three times as likely to gain additional external dir...

This paper provides empirical evidence of a strong relation between the structure of managerial compensation and both investment policy and debt policy. Higher sensitivity of CEO wealth to stock volatility (vega) is associated with riskier policy choices, including relatively more investment in R&D, more focus on fewer lines of business, and higher...

First, we specify a structural value-maximizing model of the firm, calibrate the exogenous parameters of the model to data, and show that the model and estimated productivity parameters explain the hump-shaped relation between managerial ownership and firm performance (e.g., McConnell and Servaes (1990), Morck, Shleifer, and Vishny (1988)). In addi...

Prospects for promotion provide incentives to lower-level managers in America and Japan. Promotion incentives, however, do not exist for top managers who are at the apex of their firms’ hierarchies. One little explored mechanism that might provide promotion-like incentives to top managers is the prospect of being retained on the board of directors...

This paper examines the relation between the premium on closed-end funds and organizational features of the funds and advisors, including the compensation scheme of the investment advisor. We find that the fund premium is larger when: (a) the advisor's compensation is more sensitive to fund performance; (b) the assets managed by the advisor are con...

This paper examines policies and procedures put in place by corporations to regulate trading in the stock by the firm's own insiders. Over 92% of our sample companies have their own policies restricting trading by insiders, and 78% have explicit blackout periods during which the company prohibits trading by its insiders. Our data indicate that blac...

This paper provides evidence on a previously unidentified source of managerial incentives--concerns about post-retirement board service. Both the likelihood that a retired CEO serves on his own board two years after departure, as well as the likelihood of serving as an outside director on other boards, are positively and strongly related to his per...

Large revisions in dividends are accompanied by stock price reactions for industry rivals of the announcing firm. Though these effects are near-zero on average, their magnitude differs systematically across the firms in the industry. Rivals that are unlikely to be affected by competitive realignments within the industry tend to experience stock pri...

Shareholder activists and regulators are pressuring U.S. firms to separate the titles of CEO and Chairman of the Board. They argue that separating the titles will reduce agency costs in corporations and improve performance. The existing empirical evidence appears to support this view. We argue that this separation has potential costs, as well as po...

Prior theoretical work on estimation risk generally has been restricted to single-period, returns-based models in which the investor must estimate the vector of expected returns but the covariance matrix is known. This paper extends the literature on parameter uncertainty in several ways. First, we analyze asymmetric parameter uncertainty in a mode...

In this paper we analyze how the stock-market reaction to the adoption of poison pills and the subsequent outcome of takeover attempts vary with the composition of the firm's shares among competing bidders and by other firms to entrench managers at the shareholders' expense. Our results also suggest that outside directors can be important in helpin...

The authors study the implications for shareholder wealth of interfirm antitrust litigation and how the costs of the dispute affect the propensity to settle. Upon filing, defendants experience significant wealth losses that are ten million dollars larger than the wealth gains of plaintiffs. Financial distress, behavioral constraints, and follow-on...

Shareholders activists and regulators are pressuring U.S. firms to separate the titles of CEO and Chairman of the Board. They argue that separating the titles will reduce agency costs in corporations as well as potentials benefits. Our empirical evidence provides preliminary support for the hypothesis that the costs of separation are larger than th...

This paper presents some preliminary results on predicting corporate bankruptcy using a generalized qualitative response model. The results suggest that these models may provide some improvement in forecasting as compared to a Logit model.

Outside directors have incentives to resign to protect their reputation or to avoid an increase in their workload when they anticipate that the firm on whose board they sit will perform poorly or disclose adverse news. We call these incentives the dark side of outside directors. We find strong support for the existence of this dark side. Following...

This study provides the first large-sample analysis of the stock-market reactions to interfirm litigation. When a suit is filed, the common stock of the typical defendant declines by about 1%, while the plaintiff experiences no significant gains. For the average pair of firms, the combined drop in value upon filing is $21 million. Much of the loss...

This paper examines how excessive concern over current stock price can motivate managers to use observable investment decisions to manipulate the market's inferences about the firm. The result can be overinvestment or underinvestment. Shareholders can induce optimal investment choices by structuring managerial compensation to balance both future an...

This paper examines the preferences of a representative consumer for inflation versus unemployment based on a conventional indirect utility model of consumer choice but allowing for involuntary unemployment. Using annual US aggregate data, we estimate the parameters of a particular consumer/worker preference function. These parameter estimates allo...

We analyze the effect of parameter uncertainty on equilibrium asset prices. For the symmetric case, when the amount of estimation risk is the same for all securities, the existing literature argues that parameter uncertainty is largely irrelevant for equilibrium. Our results differ. We find that symmetric estimation risk affects equilibrium values...

Possible manager-shareholder conflicts have increased the debate over the role of indemnification and directors' and officers' (D&O) liability insurance. Arguing that such insurance has adverse incentive effects which harm shareholders, some have recommended regulations to limit such practices. We provide empirical evidence on the effect of D&O ins...

The classic case of nonconvexity in consumer opportunities is that of labor supply. While most studies of labor supply concentrate on the individual agent in partial equilibrium, this study considers general equilibrium. The author shows that even with nonconvex consumer opportunities, such as those involved in the labor supply decision, the standa...

The purpose of this paper is to show that under reasonably general conditions intertemporal competitive equilibrium has a turnpike property. The model is general because it permits (1) time-variant, time-separable utility functions, (2) heterogeneous rates of discount across consumers, and (3) matching flatness in utilities and production possibili...

This paper examines real wage measures that include leisure and nonlabor income in consumption decisions with respect to the advantages and disadvantages of partial versus complete welfare orderings and of utility-based versus utility-free wage indices. In addition, we argue that the usefulness of a real wage measure beyond welfare comparison has b...

Standard general equilibrium theory excludes starvation by assuming that everybody can survive without trade. Because trade cannot harm consumers, they can therefore also sur- vive with trade. Here this assumption is abandoned, and equilibria in which not everybody survives are investigated. A simple example is discussed, along with possible polici...

We develop a measure of board co-option - the proportion of directors who joined the board after the CEO assumed office - and analyze whether this measure captures the extent to which the CEO can exert control over the board. We find that the sensitivity of CEO turnover to performance decreases in board co-option. CEO pay and pay hikes increase wit...