Executive Compensation and the Cost of Debt

We examine how executive compensation affects the cost of debt financing. Analyzing CEO pay data from the UK, we find that debt-like and equity-like pay components have opposite effects on the cost of debt. An increase in defined benefit pensions is associated with lower bond yield spread, while an increase in executive stock options intensifies it. In addition, we find some evidence that cash bonus is negatively associated with the cost of borrowing. We do not observe any relation between restricted stock grants and the cost of debt financing. Our results suggest that bondholders are fully aware of both risk-taking and risk-avoiding incentives created by various executive pay components

Investment Risk Appraisal

Standard financial techniques neglect extreme situations and regards large market shifts as too unlikely to matter. This approach may account for what occurs most of the time in the market, but the picture it presents does not reflect the reality, as the major events happen in the rest of the time and investors are ‘surprised’ by ‘unexpected’ market movements. An alternative fuzzy approach permits fluctuations well beyond the probability type of uncertainty and allows one to make fewer assumptions about the data distribution and market behaviour. Fuzzifying the present value criteria, we suggest a measure of the risk associated with each investment opportunity and estimate the project’s robustness towards market uncertainty. The procedure is applied to thirty-five UK companies and a neural network solution to the fuzzy criterion is provided to facilitate the decision-making process. Finally, we discuss the grounds for classical asset pricing model revision and argue that the demand for relaxed assumptions appeals for another approach to modelling the market environment

Exercising Authority, Restoring Accountability: AFL-CIO Proxy Voting Guidelines

[Excerpt] We are pleased to provide trustees of union benefit funds with revised AFL-CIO Proxy Voting Guidelines. These Guidelines have been updated to reflect major regulatory reforms enacted in 2002 and 2003, and to further raise the bar on corporate governance and accountability in the wake of recent corporate scandals

Stock options as incentive contracts and dividend policy

Executive Stock Option Programs (SOPs) have become the dominant compensation instrument for top-management in recent years. The incentive effects of an SOP both with respect to corporate investment and financing decisions critically depend on the design of the SOP. A specific problem in designing SOPs concerns dividend protection. Usually, SOPs are not dividend protected, i.e. any dividend payout decreases the value of a manager’s options. Empirical evidence shows that this results in a significant decrease in the level of corporate dividends and, at the same time, into an increase in share repurchases. Yet, few suggestions have been made on how to account for dividends in SOPs. This paper applies arguments from principal-agent-theory and from the theory of finance to analyze different forms of dividend protection, and to address the relevance of dividend protection in SOPs. Finally, the paper relates the theoretical analysis to empirical work on the link between share repurchases and SOPs

Evasion and Flowback in the Regulation S Era: Strengthening U.S. Investor Protection While Promoting U.S. Corporate Offshore Offerings

This Note examines whether the structure of Regulation S has caused increased flowback of unregistered securities into the United States. Part I discusses the development of the offshore capital markets and the registration requirements of the Securities Act. Part I also details the evolution of the SEC\u27s application of the Securities Act registration requirements to international securities sales, and summarizes Regulation S. Part II discusses the benefits to issuers of using Regulation S, and the effect that Regulation S has had on U.S. corporate participation in the offshore markets. Part II also analyzes the threat that flowback poses to the Securities Act disclosure requirements, and examines the mechanisms through which unregistered securities flow back into the United States. Part III argues that neither SEC enforcement efforts, nor the currently extant private remedy, can effectively curtail the flowback problem caused by Regulation S. In addition, Part III provides recommendations for amending Regulation S to ensure greater protection for U.S. investors and greater certainty for U.S. issuers in offshore transactions. This Note concludes that the SEC should revisit Regulation S in order achieve a workable balance between access for issuers and protection for investors

Do Socially Responsible Investment Indexes Outperform Conventional Indexes?

The question of whether more socially responsible (SR) firms outperform or underperform other conventional firms has been debated in the economic literature. In this study, using the socially responsible investment (SRI) indexes and conventional stock indexes in the US, the UK, and Japan, first and second moments of firm performance distributions are estimated based on the Markov switching model. We find two distinct regimes (bear and bull) in the SRI markets as well as the stock markets for all three countries. These regimes occur with the same timing in both types of market. No statistical difference in means and volatilities generated from the SRI indexes and conventional indexes in either region was found. Furthermore, we find strong comovements between the two indexes in both regimes

Awareness and stock market participation

The paper documents lack of awareness of financial assets in the 1995 and 1998 Bank of Italy Surveys of Household Income and Wealth. It then explores the determinants of awareness, and finds that the probability that survey respondents are aware of stocks, mutual funds and investment accounts is positively correlated with education, household resources, long-term bank relations and proxies for social interaction. Lack of financial awareness has important implications for understanding the stockholding puzzle and for estimating stock market participation costs. Klassifikation: E2, D8, G