Article

# The impact of firm prestige on executive compensation

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## Abstract

We show that chief executive officers (CEOs) of prestigious firms earn less. Total compensation is on average 8% lower for firms listed in Fortune’s ranking of America’s most admired companies. We suggest that CEOs are willing to trade off status and career benefits from working for a publicly admired company against additional monetary compensation. Our identification strategy is based on matched sample analyses, difference-in-differences regressions, and a regression discontinuity design. We perform several robustness checks and exclude many alternative explanations, including that firm prestige just proxies for better corporate governance or for increased exposure of the pay-setting process to media attention.

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... Theoretically, much of the existing literature that examines the link between pay and performance has relied on two main theories: optimal contracting (OCT) and prestige (PT) theories (Bebchuk et al., 2002;Focke et al., 2017). OCT suggests that highly paid managers are often subject to public scrutiny and criticism, and thus, they are likely to be motivated to improve the short-term performance targets of their institutions in order to justify their pay (Heery, 1998), and hence, OCT expects that HEIs that focus primarily on setting and meeting short-term performance targets to pay their VCs high pay packages 2 . ...
... On the other hand, PT suggests that socially/community-oriented institutions are often more concerned about promoting good social relations and networks with the various groups of stakeholders in order to improve their reputation and long-term sustainability (Focke et al., 2017). This implies that HEIs that focus on meeting long-term social performance targets are likely to pay their VCs low pay packages. ...
... Theoretically, prior studies examining the link between an institution's top management pay and performance have largely utilised two theoretical perspectives: PT and OCT (Bebchuk et al., 2002;Focke et al., 2017). PT indicates that CEOs may sometimes be concerned with meeting the long-term social interests of stakeholders in order to boost their social status and future job prospects in the labour market (Magnusson, 2016). ...
Article
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This paper investigates the association between UK higher education institutions (HEIs) long-and short-term performance measures, and the pay of vice-chancellors/principals (VCs) in an era of intense neoliberalism/financialisation of HEIs, and consequently ascertains the extent to which the VC pay-performance nexus is moderated by VC characteristics. Using a longitudinal sample of UK HEIs, our baseline findings suggest that HEIs that prioritise meeting long-term social performance targets tend to pay their VCs low pay packages, whilst HEIs that focus on achieving short-term reputational performance targets pay their VCs high pay packages. We show further that the VC pay-performance relationship is moderated/explained largely by VC characteristics. Our findings are robust to controlling for alternative governance mechanisms, endogeneities, alternative performance measures and different estimation techniques. Our findings offer empirical support for optimal contracting and prestige theories with significant implications for the sector. Keywords: Vice-Chancellor/Principal pay, Performance, Vice-Chancellor/Principal characteristics, Governance, Financialisation/Neoliberalism, HEIs, Prestige theory, UK
... According to reputation theory, reputation is an intangible asset for firms under incomplete information context (Tadelis, 1999). Agarwal et al. (2015) think that corporate reputation is a vital intangible asset and a guarantee for the managers to realize and sustain their interests (Focke et al., 2017). However, a bad reputation damages firms' value and injures manages' image, remuneration, and career development. ...
... Moreover, firms are more worried about reputation loss caused by media coverage than sanctions in an environment with weak environmental regulations. Given the negative impact of the reputation loss (Agarwal et al., 2015;Focke et al., 2017), firms are inclined to engage in environmental R&D to compensate for the reputation loss. Therefore, under weak environmental regulations, media coverage's reputation effect has more incentive effect on firms environmental R&D. ...
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Environmental research and development (R&D) is an effective means to coordinate firms’ sustainable development and environmental protection. This study investigates the impact of media coverage on environmental R&D with the Environmental Protection Law’s exogenous shock in 2015 in China. The results show that both media coverage and the Environmental Protection Law significantly promote firms’ environmental R&D. Moreover, the Environmental Protection Law strengthens the positive effect of media coverage on firms’ environmental R&D, and the strengthening effect is more significant for firms with low internal control quality and in high-competition industry. Further researches suggest that environmental R&D fully mediates the relationship between media coverage and environmental technology innovation, while the Environment Protection Law has no significant effect on environmental technology innovation. The results demonstrate external supervision or regulations are conducive to environmental R&D, which conforms to Porter Hypothesis. This study has certain enlightening significance to firms’ environmental R&D, environmental technology innovation, and sustainable development in developing economies.
... This has led to controversy about the determinants as well as the implications of compensation arrangements (e.g. Jensen & Murphy, 1990;Murphy, 1999Murphy, , 2013Bebchuk & Fried, 2003, 2005Focke, Maug, & Niessen-Ruenzi, 2017;Benischke et al., 2019). The purpose of this section is to examine whether and to what extent the observed trends in CAO compensation are accompanied by changes in the demand for skills that describe the profile of the CAO skill set, and whether the resulting variations in compensation can be regarded as, eventually, being in the interest of universities. ...
... We begin our analysis by examining the impact of CAO skills on compensation in the context of institutions with better or poorer reputations. This hypothesis is motivated by Focke et al. (2017), who find that managers of prestigious firms earn less money. ...
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Using a comprehensive sample of U.K. universities, we find that generously compensated Chief Academic Officers (CAOs) contribute to better university performance. Interestingly, while the level of CAO remuneration is positively related to general managerial skills, as proxied by the diversity of their prior work experience, such skills are not associated with superior university performance. Additional tests indicate that the positive association between CAO compensation and institutional academic performance is enhanced by managerial discretion, whereas generalist CAOs earn higher compensation when they have greater career concerns. Overall, the results inform the ongoing debate on the appropriateness of remuneration levels for CAOs and the literature on underlying causes of rising compensation levels in academic institutions.
... To make the match, we estimated propensity scores using all the variables included in our baseline model as control characteristics. We then applied six matching estimators to obtain the matched firms as selecting these firms requires decisions about closeness-of-match and the total sample size of the control firms selected (Chang & Shim, 2015;Focke et al., 2017;Lins et al., 2013;Subrahmanyam et al., 2017). Lower tolerance for the maximum propensity score distance (calliper) lessens the risk of bad matches. ...
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This paper focuses on the use of bank debt by private family firms and whether it is higher for the first generations of family businesses than for their descendants and subsequent generations. We use a unique hand‐collected data set of 4,041 private Spanish firms for the years 2004 to 2013. We find statistical evidence that family‐controlled firms make greater use of bank credit. Moreover, we show that first‐generation family firms acquire more bank debt than those of second and subsequent generations. Furthermore, during financial crises, family‐controlled firms were subjected to less rationing, with increased bank financing for first generations.
... That factor is the compensation of executives or directors. Focke, Maug, and Niessen-Ruenzi (2017) stated that CEOs of companies listed in the top 100 of Fortune's "America's Most Admired Companies" earn less. CEOs are willing to ignore additional compensation if they work for wellknown companies. ...
Article
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Tax avoidance is the hottest issue in the last five years. It is reinforced with the Tax Amnesty Program by the Directorate General of Taxation (DJP), which began in June 2016. Therefore, this study aims to obtain empirical evidence of the influence of good corporate governance and executive compensation on corporate tax avoidance. This study used 215 banking companies listed on the Indonesia Stock Exchange (IDX) for 2014-2018. This study using a purposive sampling method that produced 119 suitable samples. The analytical method used is multiple linear regression analysis through IBM SPSS Statistics 25 software. Computation of tax avoidance is proxied by computing of Effective Tax Rates (ETR). Good corporate governance is proxied by the size of the board of directors and the audit committee, and executive compensation is proxied by all director compensations. The size of the audit committee is a total of the audit committee in one period. The size of the board of directors is the total of the board committee in one period. This study used ROA and Leverage as a control variable. In this study, it was found that executive compensation and good corporate governance, which was proxied by the Size of the board of directors and the Size of the audit committee shown a positive effect on tax avoidance. Investors who do not want tax avoidance must pay attention to executive compensation and good corporate governance in the company. In contrast, control variables have not significant effect on tax avoidance.
... The main reason for the conflict of interest lies in the information asymmetry between the board of directors and the executives, which may lead to moral hazard. The principal-agent theory and optimal contract theory advocate the design of incentive contract to achieve effective governance, such as the introduction of stock options, combination of explicit and implicit incentives, and so on [25,15,9]. However, Bebchuk [3] puts forward the managerial power theory, which challenges the traditional principalagent theory. ...
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Focusing on the problem of CEO incentive and supervision, this paper constructs a three-party stochastic evolutionary game model of the CEO, compensation committee and audit committee, and analyzes the boundary conditions of the stability based on stochastic replicator dynamics equations. In addition, it carries out the numerical approximations with Taylor expansion and Ito^\documentclass[12pt]{minimal} \usepackage{amsmath} \usepackage{wasysym} \usepackage{amsfonts} \usepackage{amssymb} \usepackage{amsbsy} \usepackage{mathrsfs} \usepackage{upgreek} \setlength{\oddsidemargin}{-69pt} \begin{document}$$It{\hat{o}}$$\end{document}-type stochastic differential equation, and further analyzes the influence of key variables on the direction and convergence rate of game players' strategy choice. The results show that: (1) The probability that the CEO takes self-interested behavior falls faster and the probability that audit committee adopts supervisory strategy rises faster when the self-interested behavior of the CEO gets larger. (2) The audit committee has a fast convergence rate, and arrives earlier in the neighborhood of the stochastically stable state where the incentive coefficient adopted by the compensation committee is larger. (3) The increase in supervision intensity increases the convergence rate of the CEO, but decreases the convergence rate of the compensation committee. (4) According to a comparative analysis of noise intensity, the influence of random interference on the decision-making of the audit committee is more volatile.
... Jensen and Meckling [13] believe that the introduction of stock options can link the interests of shareholders and executives which can reduce agency costs. Furthermore, while an agent pursues explicit incentives such as salary, implicit incentives such as reputation also play important roles, and they can be used as an alternative mechanism for explicit incentives to avoid moral hazard [14,15]. Schrader and Sun [16], Alvi [17], and Markus et al. [18] further studied the influence of executives' bounded rationality behaviour on the optimal incentive contract, introduced fairness preference and self-interested behaviour of senior executives into the principal-agent model, and extended research on the incentive theory of executive agents. ...
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The process of CEO incentive and supervision, in which the special committee plays an important role, has always been a hard problem to solve in modern corporate governance. Considering the conflicts of interest between the compensation committee, audit committee, and the CEO, this paper constructed a game model of incentive and supervision within the board of directors and analysed the strategic choices of all three and the influencing mechanisms in different contexts. The results show that there is no totally stable strategy point in the system and that there are different strategy choices in different situations; the CEO’s strategy choice is influenced by both the compensation committee and the audit committee, the incentive strategy of the compensation committee will promote the CEO’s self-interested behaviour, and the supervision strategy of the audit committee is inhibitive. The function of the special committee is dependent on its initial intention and the intensity of action. In the situation of excessive incentive by the compensation committee, the strategy choice of audit committee has periodicity, and the CEO and audit committee have periodic discretionary choice game. This study provides insight into the internal governance of the board of directors, particularly special committees, which create the incentive and supervisory contracts.
... We use the nearest neighbour matching without replacement, employing a caliper distance of 0.03 to avoid bad matches. We analyse the differences in matching covariate balance between the EU and the non-EU banks, by following Focke et al. (2017) and compute the normalized differences in the pre-SACORD periods. 10 Results (not tabulated here but available on request) show that our matched samples are similar with respect to the treatment variables in both periods on all but one variable. ...
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The paper examines how the Statutory Audit and Corporate Reporting Directives (SACORD) affect the compliance costs, risk taking and quality of financial reporting of the EU banks. Using a natural experiment, we find that post SACORD, both compliance costs and risk taking increase significantly. However, the implementation of additional regulations seems to be effective in terms of improved quality of financial reporting. When we analyse the impact by size, we find that smaller banks face disproportionately higher increase in compliance costs while larger banks seem to engage in greater risk taking.
... They found that the R & D subsidy program increased the possibility of patent applications, especially for smaller companies. Focke et al. (2016) analyzed the relationship between corporate reputation and executive compensation based on three methods: matched sample analysis, DID, and regression discontinuity design. Research showed that CEOs of well-known companies will earn less. ...
... We conduct two additional analyses to address the concern that our tests are merely detecting a residual size effect that is related to the client's general visibility. First, to account for the fact that our media measures could still proxy for high-order influences of firm size that are not captured by the linear influence of our control variables, we follow Focke et al. (2017) and include size splines based on the annual decile of firm size in our regressions. Second, we follow Hilary et al. (2014) and delete observations that have both bigger firm size and greater media coverage (i.e., those for which both MV and Media are greater than their sample median values). ...
Article
We examine whether the media has an indirect corporate governance effect on financial reporting quality (FRQ) that operates through auditors. This occurs because greater media coverage can magnify an auditor’s business risk by exposing the auditor to more potential litigation and reputation damage if an audit failure occurs. We use a path analysis to examine the direct and indirect channels of media corporate governance. We find a positive association between media coverage and FRQ that is mediated by audit fees, and the results are stronger for firms with greater incentives to engage in earnings manipulation. In contrast, we find no evidence that the media has a direct corporate governance effect on FRQ. Our results show how the media’s corporate governance reach can be extended by auditors who care about how media coverage impacts their risk level.
... A positive β 4 and β 5 would suggest that by growing the firm with activities including finance lease transactions, executives in SOEs receive more compensation and government subsidies than executives in non-SOEs. The control variables are introduced referring to prior research and are defined in the Appendix (Focke et al., 2016;Wu et al., 2018;Faccio et al., 2006). The results are tabulated in Table 10. ...
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The existing literature provides extensive evidence that firms intentionally structured lease arrangements to achieve off-balance-sheet accounting treatment prior to ASU 842 (FASB, 2016) and IFRS 16 (IASB, 2016). However, this study finds the opposite for Chinese state-owned enterprises (SOEs): compared to non-SOEs, SOEs in China have a higher tendency to use finance leases rather than operating leases. This result remains significant after we control for the possibility that Chinese capital providers are discriminatively extending credit to SOEs in the form of finance leases. We explain SOEs' preference for finance leases by their executives' empire building incentives. Such incentives are created by the executives' hunger for compensation, promotion and subsidies, which are determined by the government. Consistently, we find that SOEs' engagement in finance leases increases with their incentives to expand the firms' size. And indeed, SOE executives obtain more compensation and subsidies by growing their firms with finance leases. Finally, we find that SOEs with higher borrowing costs structure more finance lease arrangements. Such structuring further increases SOEs' financial leverage and, to some extent, decreases their corporate value. Taken together, these results suggest that the benefit of the ASU 842 (or IFRS 16), which aims to bring leased assets onto the balance sheet, may be impaired in situations where executives have strong incentives to build empires.
... A CEOs will not face higher possibility of dismissal when they receive higher level of remuneration. In contrast, the acquisition has no significant impact on the turnover of the CEO of the family business [8] [9] [10]. ...
... It is concluded that the higher the long-term managerial salary, the more significant the correlation between financial performance and social performance. However, after studying Fortune's ranking of America's most admired companies, Focke et al. [34] demonstrated that these firms' total compensation is on average 8% lower than others, indicating that managers are willing to trade off career benefits from working for a company that is publicly admired against additional monetary benefits. Li and Gu [35] concluded that the reduction in managerial compensation led to a more harmonious working environment and the improvement of CSR performance. ...
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This paper uses the data of Corporate Social Responsibility (CSR) performance of A-share listed companies in China from 2013–2017 as sample to study on the impacts of managerial shareholding on CSR performance. By dividing the sample into mandatory disclosure group and voluntary disclosure group, we first empirically test the impacts of managerial shareholding on CSR performance. Then, we discuss the role of internal control quality in the impacts of managerial shareholding on CSR performance. Panel data models are employed in the empirical research and robust test. The empirical results show that: Firstly, in mandatory disclosure group, managerial shareholding has no significant impacts on CSR performance. In voluntary disclosure group, managerial shareholding has a positive impact on CSR performance. Secondly, in voluntary disclosure group, internal control quality has a positive role in the impacts of managerial shareholding on CSR performance, but this positive role cannot be supported empirically in mandatory disclosure group. Overall, these findings indicate that CSR performance is influenced by managerial shareholding and varies with CSR disclosure behaviors. The results of robust test also support this conclusion. Finally, we put forward that it would be a good choice for the companies to implement long-term equity incentives and improve internal control quality to promote CSR performance.
... Finally, our paper contributes to the broad literature on nonmonetary social comparisons and social rewards such as prestige and status. Focke, Maug, and Niessen-Ruenzi (2017) find that CEOs employed in America's most admired companies earn on average 8 % less and argue that working for a prestigious company creates an additional gain in utility, which can be extracted by pay concessions. Shi, Zhang, and Hoskisson (2017) propose that CEOs tend to respond to a competitor winning a CEO award by carrying out substantial acquisition activities in an effort to boost their own social recognition and status. ...
... Prestige of pedagogue's speciality is defined in the paper as "a complex concept that characterises a socially significant profession among other accepted professions in the state and includes a set of teachers' education and competences; working conditions; remuneration adequate to the tasks; professional autonomy (authority); and the ability to influence decision making" [12]. Scientific research about perception of prestige, the prestige of teaching [10], [3], [13] reveals relevance and novelty of theme, because on the lack of analogous research. ...
... 6 Frank (1985) indicates that employees are willing to accept lower monetary compensations in exchange for the employer's high status. Focke et al. (2017) find that CEOs of prestigious firms, as proxied by Fortune's ranking of America's Most Admired Companies (MAC), earn about 8% less on average than other CEOs of firms not listed on the MACA. 7 Market forces such as mergers and acquisitions among broker firms have little impact in China because the industry is closely regulated. ...
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... We use the data item tdc1 to operationalize total compensation for the years before 2006 and the data item total_sec for the post-2006 time period. For measures of stock option pay, we use the Black-Scholes value of stock options (Black and Scholes 1973) for the pre-2006 years (opt_blk_valu) and its equivalent option_awards_fv (Focke et al. 2017) for the post-2006 years. All compensation variables are natural logged. ...
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This paper investigates the impact of CEO excess compensation on corporate reputation. Past research has focused mainly on understanding how CEO overpayment is related to firm performance. As a consequence, we know relatively little about the implications of paying excess compensation for other important firm outcomes such as corporate reputation. By analyzing a sample of S&P 100 firms over the period 1995–2010, we show that overpayment in total compensation has a weak positive effect on a firm’s reputation while overpayment in stock options has a significant and negative impact on corporate reputation. Moreover, we find that the negative impact of CEO excess compensation in stock options is augmented if there has been a CEO change during the previous year, whereas this effect is lessened by CEO tenure. These results demonstrate that the relationship between excessive CEO compensation and corporate reputation is complex. It is influenced by the type of compensation and by specific CEO characteristics that invite greater public attention and scrutiny.
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This study investigates whether mandatory corporate social responsibility (CSR) reporting ameliorates liquidity and reduces risk for stocks. Moreover, we explore whether these impacts vary with regulated company category and stakeholder influence capacity. For a mandatory CSR reporting regulation in Taiwan, we assess the policy's effects using difference-in-differences (DID) modeling. The results show that mandatory CSR reporting significantly increases liquidity and reduces idiosyncratic risks. However, the effect on systematic risk is asymmetric-a high (low) systematic risk is accompanied by a positive (negative) market return; namely, a large (small) price increase (decrease) caused by a positive (negative) market return. This aligns with the insurance-like benefits argument. These findings suggest investors hold on to CSR firms because of increased information transparency and good financial performance during a recession. The improved liquidity is more significant for firms in the electronics and chemical industries and for firms with a large equity share owned by domestic institutional investors. Idiosyncratic risk is reduced more for the latter two. The findings provide feedback on mandatory CSR reporting to policy makers and provide reference for firms and investors.
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Although it is assumed that CEOs attempt to use corporate reputation ratings to justify increases in their annual compensation, controversy persists on the relationship between corporate reputation ratings and CEO compensation. Based on agency theory and signaling theory, we predict a positive relationship between corporate reputation ratings and CEO compensation but only during periods of economic recovery. Using a subset of Fortune’s “Most Admired” companies, this study demonstrates that corporate reputation ratings are significantly associated with CEO compensation during periods of economic recovery but not during periods of economic recession, after controlling the potential extraneous factors that may influence CEO pay.
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This chapter aims to explain the theoretical foundations of the fair CEO compensation framework. It is structured as follows: first, the fairness and fair pay concepts are introduced, then the prominent and most pertinent theories and school of thoughts regarding compensation and fair and optimal pay are presented in Sects. 2.1 and 2.2, respectively. Finally, how it can be applied or how it has been applied to the practice is illustrated in Sect. 2.3.
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In this chapter, the fifth aspect of the “Fair CEO Compensation” octagonal framework, “Compensation according to the Characteristics, Competence, and Individual Performance (CCIP)” is introduced. First, the theoretical concept and the link between CCIP and total CEO compensation are illustrated, then practitioners’ viewpoints on individual performance (IP) and the implementation of the IP criterion into the remuneration policy are represented.
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Using multiple measures of attack proximity, we show that CEOs employed at firms located near terrorist attacks earn an average pay increase of 12% after the attack relative to CEOs at firms located far from attacks. CEOs at terrorist attack-proximate firms prefer cash-based compensation increases (e.g., salary and bonus) over equity-based compensation (e.g., options and stocks granted). The effect is causal and it is larger when the bargaining power of the CEO is high. Other executives and workers do not receive a terrorist attack premium.
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We examine whether, how, and why acquirer shareholder voting matters. We show that acquirers with low institutional ownership, high deal risk, and high agency costs are more likely to bypass shareholder voting. Such acquirers have lower announcement returns and make higher offers than those who do not. To avoid a shareholder vote, acquirers increase equity issuance and cut payouts to raise the portion of cash in mixed-payment deals. Employing a regression discontinuity design, we show a positive effect on acquirer announcement returns concentrated in acquirers with higher institutional ownership. We conclude that shareholder voting mitigates agency problems in corporate acquisitions. Received April 18, 2017; editorial decision February 9, 2018 by Editor David Denis. Authors have furnished an Internet Appendix, which is available on the Oxford University Press Web site next to the link to the final published paper online.
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This chapter summarizes the empirical and theoretical research on executive compensation and provides a comprehensive and up-to-date description of pay practices (and trends in pay practices) for chief executive officers (CEOs). Topics discussed include the level and structure of CEO pay (including detailed analyses of annual bonus plans, executive stock options, and option valuation), international pay differences, the pay-setting process, the relation between CEO pay and firm performance (“pay-performance sensitivities”), the relation between sensitivities and subsequent firm performance, relative performance evaluation, executive turnover, and the politics of CEO pay.
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We use a bargaining framework to examine empirically the relations between director compensation and board-of-director independence. Our evidence suggests that independent directors have a bargaining advantage over the CEO that results in compensation more closely aligned with shareholders’ objectives. Firms with more outsiders on their boards award directors more equity-based compensation. When the CEO's power over the board increases, compensation provides weaker incentives to monitor. Firms with more inside directors and with entrenched CEOs use less equity-based pay. Furthermore, firms with entrenched CEOs and CEOs who also chair the board are less likely to replace cash pay with equity.
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This paper presents specification tests that are applicable after estimating a dynamic model from panel data by the generalized method of moments (GMM), and studies the practical performance of these procedures using both generated and real data. Our GMM estimator optimally exploits all the linear moment restrictions that follow from the assumption of no serial correlation in the errors, in an equation which contains individual effects, lagged dependent variables and no strictly exogenous variables. We propose a test of serial correlation based on the GMM residuals and compare this with Sargan tests of over-identifying restrictions and Hausman specification tests.
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I study large charitable stock gifts by Chairmen and Chief Executive Officers (CEOs) of public companies. These gifts, which are not subject to insider trading law, often occur just before sharp declines in their companies' share prices. This timing is more pronounced when executives donate their own shares to their own family foundations. Evidence related to reporting delays and seasonal patterns suggests that some CEOs fraudulently backdate stock gifts to increase personal income tax benefits. CEOs' family foundations hold donated stock for long periods rather than diversifying, permitting CEOs to continue voting the shares.
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There is considerable and widespread concern about whether CEOs are appropriately punished for poor performance. The empirical literature on CEO turnover documents that CEOs are indeed more likely to be forced out if their performance is poor relative to the industry average. However, CEOs are also more likely to be replaced if the industry is doing badly. We show that these empirical patterns are natural and efficient outcomes of a competitive assignment model in which CEOs and firms form matches based on multiple characteristics, and where industry conditions affect the outside options of both managers and firms. Our model also has several new predictions about the type of replacement manager, and their pay and performance. We construct a dataset which describes all turnover events during the period 1992-2006 and show that these predictions are also born out empirically.
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Economists have long been concerned with the incentive problems that arise when decision making in a firm is the province of managers who are not the firm's security holders. One outcome has been the development of “behavioral” and “managerial” theories of the firm which reject the classical model of an entrepreneur, or owner-manager, who single-mindedly operates the firm to maximize profits, in favor of theories that focus more on the motivations of a manager who controls but does not own and who has little resemblance to the classical “economic man.” Examples of this approach are Baumol (1959), Simon (1959), Cyert and March (1963), and Williamson (1964b). More recently the literature has moved toward theories that reject the classical model of the firm but assume classical forms of economic behavior on the part of agents within the firm. The firm is viewed as a set of contracts among factors of production, with each factor motivated by its self-interest. Because of its emphasis on the importance of rights in the organization established by contracts, this literature is characterized under the rubric “property rights.” Alchian and Demsetz (1972) and Jensen and Meckling (1976b) are the best examples. The antecedents of their work are in Coase (1937, 1960). The striking insight of Alchian and Demsetz (1972) and Jensen and Meckling (1976b) is in viewing the firm as a set of contracts among factors of production.
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Recent studies argue that the spread-adjusted Taylor rule (STR), which includes a response to the credit spread, replicates monetary policy in the United State. We show (1) STR is a theoretically optimal monetary policy under heterogeneous loan interest rate contracts in both discretionay and commitment monetary policies, (2) however, the optimal response to the credit spread is ambiguous given the financial market structure in theoretically derived STR, and (3) there, a commitment policy is effective in narrowing the credit spread when the central bank hits the zero lower bound constraint of the policy rate.
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The paper uses a simple multitask career concern model in order to analyse the incentives of government agencies' officials. Incentives are impaired by the agency pursuing multiple missions. A lack of focus is even more problematic in the case of fuzzy missions, that is when outsiders are uncertain about the exact nature of the missions actually pursued by the agency. Consequently agencies pursuing multiple missions receive less autonomy. The paper further shows that professionalization creates a sense of mission for the agency, and that the specialization of officials raises their incentives. Last, the paper compares its predictions with the stylized facts on Government bureaucracies.
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This paper develops the method of matching as an econometric evaluation estimator. A rigorous distribution theory for kernel-based matching is presented. The method of matching is extended to more general conditions than the ones assumed in the statistical literature on the topic. We focus on the method of propensity score matching and show that it is not necessarily better, in the sense of reducing the variance of the resulting estimator, to use the propensity score method even if propensity score is known. We extend the statistical literature on the propensity score by considering the case when it is estimated both parametrically and nonparametrically. We examine the benefits of separability and exclusion restrictions in improving the efficiency of the estimator. Our methods also apply to the econometric selection bias estimator.