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Author: Alexander Ljungqvist Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
We examine the relation between firm value and managerial incentives in a sample of 1,307 publicly-held U.S. firms in 1992-1997. As predicted by Berle and Means (1932), we find that CEOs do not maximize firm value when they are not the residual claimant: our firms have higher Tobin's Q, the higher are CEO stockholdings. We also investigate the incentive properties of options and find that CEOs appear to hold too many options and that these options are insufficiently sensitive to firm risk. Our results do not appear to be driven by endogeneity biases. To assess the economic significance of the suboptimal provision of incentives, we compute an explicit performance benchmark which compares a firm's actual Tobin's Q to the Q* of a hypothetica fully-efficient firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 12% lower than its Q*, equivalent to a $751 million reduction in its potential market value.
Author: Alexander Ljungqvist Publisher: ISBN: Category : Languages : en Pages : 40
Book Description
We examine the relation between firm value and managerial incentives in a sample of 1,307 publicly-held U.S. firms in 1992-1997. As predicted by Berle and Means (1932), we find that CEOs do not maximize firm value when they are not the residual claimant: our firms have higher Tobin's Q, the higher are CEO stockholdings. We also investigate the incentive properties of options and find that CEOs appear to hold too many options and that these options are insufficiently sensitive to firm risk. Our results do not appear to be driven by endogeneity biases. To assess the economic significance of the suboptimal provision of incentives, we compute an explicit performance benchmark which compares a firm's actual Tobin's Q to the Q* of a hypothetica fully-efficient firm having the same inputs and characteristics as the original firm. The Q of the average sample firm is around 12% lower than its Q*, equivalent to a $751 million reduction in its potential market value.
Author: Markus Schmid Publisher: ISBN: Category : Languages : en Pages : 45
Book Description
This paper presents an integrated analysis of the relationships between managerial share ownership (or alternatively the percentage of equity-based compensation), four additional corporate governance mechanisms, and firm value by explicitly incorporating the simultaneity of the process determining these variables into the empirical investigation. For a sample of 145 Swiss firms, we find a significantly positive valuation effect of managerial shareholdings and the percentage of equity-based compensation including shares and options. We also find significant relationships between various corporate governance proxies indicating that several mechanisms are substituted for each other. This finding clarifies the importance of using a simultaneous equations approach and treating governance mechanisms (and firm value) as endogenous variables.
Author: Feng Zhang Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
This paper investigates interactions between two central corporate governance mechanisms: shareholder rights and managerial ownership. I find that the effect of managerial ownership on firm value crucially depends on shareholder rights. Managerial ownership enhances firm value when shareholder rights are strong, but reduces firm value when shareholder rights are weak. Announcement returns of manager share purchases in the open market are also lower for firms with weak shareholder rights. Furthermore, firms with weak shareholder rights have significantly lower managerial ownership. My findings suggest that shareholder rights and managerial ownership are complementary governance mechanisms.
Author: Stefan Beiner Publisher: ISBN: Category : Languages : en Pages : 53
Book Description
This paper contributes to the very small empirical literature on the effects of competition on managerial incentive schemes. Based on a theoretical model that incorporates both strategic interaction between firms and a principal agent relationship, we analyze the relationship between product market competition, incentive schemes and firm valuation. The model predicts a nonlinear relationship between the intensity of product market competition and the strength of managerial incentives. We test the implications of our model empirically based on a unique and hand-collected dataset comprising over 600 observations on 200 Swiss firms over the 2002 to 2005 period. Our results suggest that, consistent with the implications of our model, the relation between product market competition and managerial intensive schemes is convex indicating that above a certain level of intensity in product market competition, the marginal effect of competition on the strength of the incentive schemes increases in the level of competition. Moreover, competition is associated with lower firm values. These results are robust to accounting for a potential endogeneity of managerial incentives and firm value in a simultaneous equations framework.
Author: Tom Nohel Publisher: ISBN: Category : Languages : en Pages : 42
Book Description
We examine the effect of stock options on managerial incentives to invest. Our chief innovation is a model wherein firm value and executive decisions are endogenous. Numerical solutions to our model show that managerial incentives to invest are multi-dimensional and highly sensitive to option strike prices, the manager's wealth, degree of diversification, risk aversion, and career concerns. We find that over-investment problems are far more likely and far more severe than many researchers suggest. Finally, firm value is not a strictly increasing function of a manager's incentive compensation or conventional pay-for-performance metrics. Stronger managerial incentives to invest can benefit or harm a firm. Our results should send a cautionary signal to researchers who study managerial behavior. It is not sufficient to rely on one-dimensional risk-neutral valuation metrics, such as pay-for-performance, to describe the degree of incentive alignment between managers and shareholders.
Author: Pierre Chaigneau Publisher: ISBN: Category : Languages : en Pages : 37
Book Description
Shareholders with standard monetary preferences will give a manager incentives to increase firm profits, which can be achieved with equity grants. When shareholders are socially responsible, in the sense that they also value corporate social performance, it is not clear which incentives the manager should receive. Yet, in a standard principal-agent model, we show that the optimal contract is surprisingly simple: it consists in giving equity holdings to the manager. This is notably because the stock price will incorporate expected profits as well as the social performance of the firm, to the extent that it is valued by shareholders. Consequently, equity holdings give the manager incentives to jointly maximize the profits and the social performance of the firm according to shareholders' preferences. To facilitate alignment of interests, more socially responsible firms will optimally hire more socially responsible managers. We conclude that neither the shareholder primacy model nor equity-based managerial compensation are necessarily inconsistent with the attainment of social objectives.
Author: Phillip Leslie Publisher: ISBN: Category : Incentives in industry Languages : en Pages : 58
Book Description
We analyze the differences between companies owned by private equity (PE) investors and similar public companies. We document that PE-owned companies use much stronger incentives for their top executives and have substantially higher debt levels. However, we find little evidence that PE-owned firms outperform public firms in profitability or operational efficiency. We also show that the compensation and debt differences between PE-owned companies and public companies disappear over a very short period (one to two years) after the PE-owned firm goes public. Our results raise questions about whether and how PE firms and the incentives they put in place create value.
Author: Alexander Ljungqvist
Author: Alexander Ljungqvist
Author: Michel Habib
Author: Markus Schmid
Author: Feng Zhang
Author: Stefan Beiner
Author: Shawn David Phelps
Author: Tom Nohel
Author: Pierre Chaigneau
Author: Harold Demsetz
Author: Phillip Leslie