Executive compensation : a modern primer

This article studies traditional and modern theories of executive compensation, bringing them together under a unifying framework. We analyze assignment models of the level of pay, and static and dynamic moral hazard models of incentives, and compare their predictions to empirical findings. We make two broad points. First, traditional optimal contracting theories find it difficult to explain the data, suggesting that compensation results from "rent extraction" by CEOs. In contrast, more modern theories that arguably better capture the CEO setting do deliver predictions consistent with observed practices, suggesting that these practices need not be inefficient. Second, seemingly innocuous features of the modeling setup, often made for tractability or convenience, can lead to significant differences in the model's implications and conclusions on the efficiency of observed practices. We close by highlighting apparent inefficiencies in executive compensation and additional directions for future research

The source of information in prices and investment-price sensitivity

This paper shows that real decisions depend not only on the total amount of information in prices, but the source of this information -- a manager learns from prices when they contain information not possessed by him. We use the staggered enforcement of insider trading laws across 27 countries as a shock to the source of information that leaves total information unchanged: enforcement reduces (increases) managers' (outsiders') contribution to the stock price. Consistent with the predictions of our theoretical model, enforcement increases investment-q sensitivity, even when controlling for total price informativeness. The effect is larger in industries where learning is likely to be stronger, and in emerging countries where outsider information acquisition rises most post-enforcement. Enforcement does not increase the sensitivity of investment to cash flow, a non-price measure of investment opportunities. These findings suggest that extant measures of price efficiency should be rethought when evaluating real efficiency

Feedback Effects, Asymmetric Trading, and the Limits to Arbitrage

We analyze strategic speculators' incentives to trade on information in a model where firm value is endogenous to trading, due to feedback from the financial market to corporate decisions. Trading reveals private information to managers and improves their real decisions, enhancing fundamental value. This feedback effect has an asymmetric effect on trading behavior: it increases (reduces) the profitability of buying (selling) on good (bad)news. This gives rise to an endogenous limit to arbitrage, whereby investors may refrain from trading on negative information. Thus, bad news is incorporated more slowly into prices than good news, potentially leading to overinvestment

The DRESS trial: a feasibility randomized controlled trial of a neuropsychological approach to dressing therapy for stroke inpatients

Objective: To investigate two approaches to treating patients with persistent dressing problems and cognitive difficulties following stroke. Design: Pilot randomized controlled trial. Setting: Inpatient stroke rehabilitation service. Subjects: Seventy consecutive stroke patients with persistent dressing problems and accompanying cognitive difficulties at two weeks after their stroke. Interventions: Patients were randomly allocated to six weeks of either a systematic neuropsychological approach, based on analysis of dressing problems and further cognitive testing, or to the control group who received conventional (functional) dressing practice. Both groups received treatment three times a week in accordance with two separately prepared manuals. Main measures: Nottingham Stroke Dressing Assessment (NSDA), Line Cancellation, 10-hole peg transfer test, Object Decision, Gesture Imitation. Patients were assessed at six weeks after randomization by an independent assessor masked to group allocation. Results: Both neuropsychological and functional groups improved performance on the NSDA over the treatment period (31% and 22%, respectively) but there was no significant difference between groups at six weeks. However, the neuropsychological group showed a significantly greater improvement on a line cancellation test of visual neglect (t(62) = 2.1, P < 0.05) and a planned subanalysis for those with right hemisphere damage showed a trend towards better dressing outcome (P = 0.07, one-tailed). Conclusions: Results demonstrate the potential benefits of a systematic neuropsychological approach to dressing therapy, particularly for patients with right hemisphere damage. This study suggests the need for a phase III study evaluating the efficacy of a systematic neuropsychological approach in treating dressing difficulties, targeting patients with right hemisphere stroke and visuospatial impairments

Company purpose and profit need not be in conflict if we ‘grow the pie’

An apparent consensus exists amongst politicians, citizens, and even executives themselves – at both ends of the political spectrum and in many countries – that capitalism isn't working for ordinary people

CEO Compensation

This paper surveys the recent literature on CEO compensation. The rapid rise in CEO pay over the past 30 years has sparked an intense debate about the nature of the pay-setting process. Many view the high level of CEO compensation as the result of powerful managers setting their own pay. Others interpret high pay as the result of optimal contracting in a competitive market for managerial talent. We describe and discuss the empirical evidence on the evolution of CEO pay and on the relationship between pay and firm performance since the 1930s. Our review suggests that both managerial power and competitive market forces are important determinants of CEO pay, but that neither approach is fully consistent with the available evidence. We briefly discuss promising directions for future research

Learnings From 1,000 Rejections

The Review of Finance aimed to significantly increase its standards over my 6 years as Managing Editor and 1 year as Editor. To comply with these new standards, I had to reject nearly 1,000 manuscripts. This article aims to use these rejections constructively by distilling common reasons for rejection to guide future research. They are divided into three categories: contribution, execution, and exposition. Beyond extracts from decision letters that give reasons for rejection, this article also shares excerpts that shed light on the editorial process, such as how an editor weighs up feedback to reach a decision, as well as emails to authors outside formal letters in response to queries on the process

The purpose of a finance professor

The academic finance profession has the potential to be uniquely purposeful due to four characteristics – the freedom to take risks and work on what we're passionate about, the loyalty to our profession rather than just our institution, the collaborative nature of the creation and dissemination of knowledge, and the magnitude of our potential impact. However, what the profession currently values, and its current social norms, are significant barriers to the fulfilment of this potential. This article highlights the special features of our profession that we often take for granted and ignore, and proposes ideas to make it not only more impactful and relevant but also more collegial and fun

Financing Through Asset Sales

Most research on firm financing studies debt versus equity issuance. We model an alternative source, non-core asset sales, and identify three new factors that contrast it with equity. First, unlike asset purchasers, equity investors own a claim to the firm’s balance sheet (the “balance sheet effect”). This includes the cash raised, mitigating information asymmetry. Contrary to the intuition of Myers and Majluf (1984), even if non-core assets exhibit less information asymmetry, the firm issues equity if the financing need is high. Second, firms can disguise the sale of low-quality assets –but not equity –as motivated by dissynergies (the “camouflage effect”). Third, selling equity implies a “lemons” discount for not only the equity issued but also the rest of the firm, since both are perfectly correlated (the “correlation effect”). A discount on assets need not reduce the stock price, since non-core assets are not a carbon copy of the firm