Golden Handshakes: Separation Pay for Retired and Dismissed CEOs

This paper studies separation payments made when CEOs leave their firms. In a sample of 179 exiting Fortune 500 CEOs, more than half receive severance pay and the mean separation package is worth $5.4 million. The large majority of severance pay is awarded on a discretionary basis by the board of directors and not according to terms of an employment agreement. For the subset of exiting CEOs who are dismissed, separation pay generally conforms to theories related to bonding and damage control. Shareholders react negatively when separation agreements are disclosed, but only in cases of voluntary CEO turnover.CEO turnover; severance pay

Transparency, financial accounting information, and corporate governance

Audited financial statements along with supporting disclosures form the foundation of the firm-specific information set available to investors and regulators. In this article, the authors discuss economics-based research focused on the properties of accounting systems and the surrounding institutional environment important to effective governance of firms. They provide a framework for understanding the operation of accounting information in an economy, discuss a broad range of important research findings, present a conceptual framework for characterizing and measuring corporate transparency at the country level, and isolate a number of future research possibilities.Corporations - Accounting ; Stockholders ; Corporate governance

Essays on the economic theory of managerial incentives

Corporations are very common in the business world. In this kind of organizations shareholders are protected by limited liability and, furthermore, they can easily transfer their shares. As a consequence, investors might be interested in buying a corporation's shares just to diversify their portfolios, without any real interest in getting involved in management. It is therefore much easier for corporations to obtain external finance than other organizational forms, and this might well be the basic reason for their wide diffusion. For the very same reason, however, it is necessary to hire professional managers to make all the relevant decisions, and this contains the seed of their problematic governance. In fact, the separation of ownership and control produces a conflict of interest between shareholders, interested in maximizing the firm value, and managers, who can be interested in pursuing a variety of different objectives (empire building, entrenchment, shirking, etc.). This dissertation is composed by three research papers dealing with the economics of managerial incentive provision. It is common to interpret the relationship between shareholders and managers as an agency relationship affected by both a moral hazard and adverse selection problem. Usually, managerial incentives are affected by several elements such as, for example, their compensation packages and career concerns, the internal monitoring of the board of directors, the external monitoring of the market for corporate control, etc. This dissertation suggests that it might be necessary to consider Overview 2 the interactions between alternative incentive mechanisms both to better understand their functioning and, at least as importantly, to help interpreting empirical observations. The first chapter, Paying for Observable Luck, proposes a simple hidden action model which explains recent empirical evidence of asymmetric benchmarking in managerial compensation: managers appear to be insulated from bad luck but not from good luck. The explanation hinges on the interaction between explicit contractual incentives and implicit incentives deriving from the possibility of bankruptcy. The second chapter, Career Concerns and Competitive Pressure, studies how the level of competition in the product market a ects the strength of managerial career concerns. Good managers are in short supply so that firms are willing to compete for them. However, the value of good managers depends on the profit differential they are able to produce on the product market. It is then shown that increased competition makes career concerns stronger if it increases such profit differential. The third chapter, Managerial Entrenchment and the Market for CEOs, suggests that the observed trends of increased managerial pay and increased board independence might be related. Boards captured by an entrenched managers are not active on the demand side of the managerial labor market. Therefore, increased board independence, reducing the number of captured boards, also increases competition for good managers, then rising their pay and making their career concerns stronger

Corporate Governance and Control

Corporate governance is concerned with the resolution of collective action problems among dispersed investors and the reconciliation of conflicts of interest between various corporate claimholders. In this survey we review the theoretical and empirical research on the main mechanisms of corporate control, discuss the main legal and regulatory institutions in different countries, and examine the comparative corporate governance literature. A fundamental dilemma of corporate governance emerges from this overview: regulation of large shareholder intervention may provide better protection to small shareholders; but such regulations may increase managerial discretion and scope for abuse.

CEO Turnover and Volatility under Long-Term Employment Contracts

© 2019 Cambridge University Press. We study the role of the contractual time horizon of CEOs for CEO turnover and corporate policies. Using hand-collected data on 3,954 fixed-term CEO contracts, we show that remaining time under contract predicts CEO turnover. When contracts are close to expiration, turnover is more likely and is more sensitive to performance. We also show a positive within-CEO relation between remaining time under contract and firm risk. Our results are similar across short and long contracts and are driven neither by firm or CEO survival, nor technological cycles. They are consistent with incentives to take long-term projects with interim volatility

The Effectiveness Of Internal And External Mechanisms Of Corporate Control

This research reflects a recent trend toward the development of an overall understanding of corporate control. Previous research has examined CEO turnover and corporate takeovers separately. This research provides a more complete analysis of the corporate control of the firm conditioned on previous events over the period 1978 - 1988. Logistic regression analyses indicate that the probability of a takeover offer is highest for firms performing poorly which have not previously replaced their CEO. Debt, the percentages of stock held by the ceo or outside investor, and the existence of an antitakeover mechanism also affect the probability of a firm receiving a takeover offer. Results support the theory that external corporate control mechanisms do function when internal mechanisms have failed to function. Additionally, results suggest the external labor market is working to attract the CEO of a firm performing well

Executive Compensation in America: Optimal Contracting or Extraction of Rents?

This paper develops an account of the role and significance of rent extraction in executive compensation. Under the optimal contracting view of executive compensation, which has dominated academic research on the subject, pay arrangements are set by a board of directors that aims to maximize shareholder value by designing an optimal principal-agent contract. Under the alternative rent extraction view that we examine, the board does not operate at arm's length; rather, executives have power to influence their own compensation, and they use their power to extract rents. As a result, executives are paid more than is optimal for shareholders and, to camouflage the extraction of rents, executive compensation might be structured sub-optimally. The presence of rent extraction, we argue, is consistent both with the processes that produce compensation schemes and with the market forces and constraints that companies face. Examining the large body of empirical work on executive compensation, we show that the picture emerging from it is largely compatible with the rent extraction view. Indeed, rent extraction, and the desire to camouflage it, can better explain many puzzling features of compensation patterns and practices. We conclude that extraction of rents might well play a significant role in U.S. executive compensation; and that the significant presence of rent extraction should be taken into account in any examination of the practice and regulation of corporate governance.

External agency: Redefinition of ex ante value in agency relationships

In this dissertation, in response to mixed empirical findings and theoretical criticism of Agency Theory, I raise a broader question: are there agency behaviors that are not considered within traditional renderings of Agency Theory? I argue that, because agents vary in their mobility, human market imperfections and their ex ante costs do not disappear with creation of a contract and cannot be assumed away. These costs are constantly redefined and must be included in the general model of agency that I develop. I define certain behaviors that are ex ante driven to be external agency behaviors.In this dissertation I define five aspects of agent mobility that facilitate ex ante driven external agency: 1) availability of alternative contracts; 2) heterogeneity in general human capital; 3) heterogeneity in social capital; 4) heterogeneity in agent's charisma; and 5) outcome measurability. I develop a theoretical model of how agent mobility moderates the fundamental theoretical relationships in Agency Theory and develop a set of hypotheses to test my arguments.The results of this dissertation provide support for the conceptualization of agent's mobility as a previously unexplored alignment mechanism in the agency relationship that lowers the downside risk of the agent and can enhance the alignment of risk preferences and goals between the agent and the principal. I find support for the existence of ex ante agency costs that are associated with the expansion of market for contracts via diversification. The results also provide evidence to the costs of agent's mobility in terms of higher increases in total compensation for more mobile agents