Do Stock Prices Incorporate the Potential Dilution of Employee Stock Options?

Employee stock options represent a significant potential source of dilution for many shareholders. It is well known that reported earnings tend to understate the associated costs, but an efficient stock market will show no such bias. If by contrast stock prices underestimate the future costs implied by stock option grants, option exercises will produce negative abnormal returns. We design and implement a stock-picking rule based on predictions of stock-option exercise using widely available data. The rule identifies stocks that subsequently suffer significnt negative abnormal returns using either a CAPM or the three factor Fama-French benchmarks. According to our point estimates, if the cost of employee stock options as a fraction of market capitalization is 10%, the stock will subsequently exhibit a negative abnormal return of between 3% and 5%. There is some evidence of market learning in that the abnormal returns tend to fall over time. We use a restricted sample of actual stock exercises and find that the reduced power of our trading rule does not reflect a reduced ability to predict stock option exercise. It also does not seem to reflect improved accounting disclosure since the portion of option costs recognized in diluted earnings per share appears to be priced by the market in all our sample years.

Market-Indexed Executive Compensation: Strictly for the Young

Academics have long argued that incentive contracts for executives should be indexed to remove the influence of exogenous market factors. Little evidence has been found that firms engage in such practices, also termed "relative performance evaluation". We argue that firms may not gainmuch by removing market risks from executive compensation because (i) the market provides compensation for bearing systematic risk via the market risk premium and therefore the executive desires positive exposure to such risks, and (ii) the executive can, in principle, adjust her personal portfolio to o.set any unwanted market risk imposed by her compensation contract. A testable implication is that stock-based performance incentives will be weaker when idiosyncratic risks are large but that market risks will have little e.ect. The data tend to support this hypothesis. In the full sample of CEO compensation from ExecuComp, stock-based incentives are strictly decreasing in firm-specific risk. Market-specific risks, however, are insignificantly related to incentives. The story changes somewhat when we distinguish between younger and older CEOs. Our theory is arguably less applicable to younger CEOs who have more non-tradeable exposure to systematic risk through their human capital. Consistent with this argument, we find that market risks have a negative e.ect on stock-based incentive pay for younger CEOs, while they don’t for older CEOs. This in turn implies that the traditional argument for indexation is indeed valid for younger CEOs, and we find some evidence in favor of this proposition. Specifically, we find evidence of indexation for younger but not for older CEOs. Even for younger CEOs, however, the e.ect is far too weak to remove the e.ects of market risk. This is consistent with our finding that market risk reduces pay-performance for young CEOs, but leaves the question of why there is not more indexing for such executives.

EVA versus Earnings: Does it Matter which is More Highly Correlated with Stock Returns?

Dissatisfaction with traditional accounting-based performance measures has spawned a number of alternatives, of which Economic Value Added (EVA) is clearly the most prominent. How can we tell which performance measures best capture managerial contributions to value? There is currently a heated debate among practitioners as to whether the new performance measures have a higher correlation with stock values and returns than do traditional accounting earnings. Academic researchers have instead relied on the variance of performance measures to gauge their relative accuracy. Our analysis pits EVA against earnings as two candidate performance measures. We use a relatively standard principal-agent model, but recognize that while the variability of each measure is observable, their exact information (signal) content is not. The model provides a formal method for ascertaining the relative value of such measures based on two distinct uses of the stock price. First, as is well-known, prices provide a noisy measure of managerial value-added. Our novel insight is that stock prices can also reveal the signal content of alternative accounting-based performance measures. We then show how to combine stock prices, earnings, and EVA to produce an optimally weighted compensation scheme. Surprisingly, we find that the simple correlation between EVA or earnings and stock returns is a reasonably reliable guide to their value as an incentive contracting tool. This is not because stock returns are themselves an ideal performance measure, rather it is because correlation places appropriate weights on both the signal and noise components of alternative measures. We then calibrate the theoretical improvement in incentive contracts from optimally using EVA in addition to accounting earnings at the firm and industry level. That is, we empirically estimate the "value-added" of EVA by firm and industry. These estimates are positive and significant in predicting which firms have actually adopted EVA as an internal performance measure.

Asymmetric Benchmarking in Compensation: Executives are Paid for (Good) Luck But Not Punished for Bad

Principal-agent theory suggests that a manager should be paid relative to a benchmark that captures the effect of market or sector performance on the firm's own performance. Recently, it has been argued that we do not observe such indexation in the data because executives can set pay in their own interests, that is, they can enjoy "pay for luck" as well as "pay for performance". We first show that this argument is flawed. The positive expected return on stock markets reflects compensation for bearing systematic risk. If executives' pay is tied to market movements, they can only expect to receive the market-determined return for risk-bearing. We then reformulate the argument in a more appropriate fashion. If managers can truly influence the nature of their pay, they will seek to have their pay benchmarked only when it is in their interest, namely when the benchmark has fallen. Using a variety of market and industry benchmarks, we find that there is essentially no indexation when the benchmark return is up, but uncover substantial indexation when the benchmark has turned downwards. These empirical results are robust to a variety of alternative hypotheses and robustness checks, and suggest an increase in expected direct compensation of approximately $75,000 for the median executive in our sample, or about 5% of total compensation.

Baryon Number Flow in High-Energy Collisions

It is not obvious which partons in the proton carry its baryon number (BN). We present arguments that BN is associated with a specific topology of gluonic fields, rather than with the valence quarks. The BN distribution is easily confused with the difference between the quark and antiquark distributions. We argue, however, that they have quite different x-dependences. The distribution of BN asymmetry distribution is nearly constant at small x while q(x)-\bar q(x) \propto \sqrt{x}. This constancy of BN produces energy independence of the \bar pp annihilation cross section at high energies. Recent measurement of the baryon asymmetry at small x at HERA confirms this expectation. The BN asymmetry at mid-rapidities in heavy ion collisions is substantially enhanced by multiple interactions, as has been observed in recent experiments at the SPS. The same gluonic mechanism of BN stopping increases the production rate for cascade hyperons in a good accord with data. We expect nearly the same as at SPS amount of BN stopped in higher energy collisions at RHIC and LHC, which is, however, spread ove larger rapidity intervals.Comment: The estimated baryon stopping at RHIC is corrected in the Summar

Hybrid thermocouple development program

The design and development of a hybrid thermocouple, having a segmented SiGe-PbTe n-leg encapsulated within a hollow cylindrical p-SiGe leg, is described. Hybrid couple efficiency is calculated to be 10% to 15% better than that of a all-SiGe couple. A preliminary design of a planar RTG, employing hybrid couples and a water heat pipe radiator, is described as an example of a possible system application. Hybrid couples, fabricated initially, were characterized by higher than predicted resistance and, in some cases, bond separations. Couples made later in the program, using improved fabrication techniques, exhibited normal resistances, both as-fabricated and after 700 hours of testing. Two flat-plate sections of the reference design thermoelectric converter were fabricated and delivered to NASA Lewis for testing and evaluation

Municipal Bankruptcy and Public Pensions: Detroit\u27s Eligibility for Chapter 9 Relief and Legal Restraints on the City\u27s Actions as a Debtor

This Note will seek to address the constitutional and statutory issues raised in the early stages of Detroit’s bankruptcy. Part I will briefly address how Detroit reached the point where municipal bankruptcy became legally possible and politically attractive. It will examine population trends in the city, changes in the character of Detroit’s major industries, and the deterioration of city services. Part II will provide background information about the history of municipal bankruptcy in America and the constitutional challenges that it has faced. It will attempt to give a base from which to examine the major issues raised by Detroit’s case and how they might fit into the history of municipal bankruptcy and America’s system of federalism. Specifically, it will address the Supreme Court’s decision in United States v. Bekins and some of the cases that have followed. Part III will dive into the issues raised by objectors to Detroit’s filing. While the objectors have raised at least thirteen distinct objections to the filing, this Note will concentrate on three. First, an effort will be made to demonstrate that contrary to some of the objections raised in the Detroit case, Chapter 9 is facially constitutional. Next, it will examine Michigan’s authorization of Detroit’s bankruptcy petition in accordance with § 109(c) of the Bankruptcy Code. It will argue that Public Act 436, the Michigan law that authorizes municipal bankruptcy and sets out the procedures that must be followed to file under Chapter 9, is constitutional and that the filing in this case complied with both federal and state law. It will also argue that Chapter 9 is constitutional as applied to Detroit, and that the protections present in Chapter 9 do more than enough to overcome any potential Tenth Amendment issue in Detroit’s filing. Finally, it will argue that, due to the Bankruptcy Code’s incorporation of state law property definitions, public sector pensions may not be reduced in Michigan by any means, including Chapter 9 bankruptcy

Municipal Bankruptcy and Public Pensions: Detroit\u27s Eligibility for Chapter 9 Relief and Legal Restraints on the City\u27s Actions as a Debtor

This Note will seek to address the constitutional and statutory issues raised in the early stages of Detroit’s bankruptcy. Part I will briefly address how Detroit reached the point where municipal bankruptcy became legally possible and politically attractive. It will examine population trends in the city, changes in the character of Detroit’s major industries, and the deterioration of city services. Part II will provide background information about the history of municipal bankruptcy in America and the constitutional challenges that it has faced. It will attempt to give a base from which to examine the major issues raised by Detroit’s case and how they might fit into the history of municipal bankruptcy and America’s system of federalism. Specifically, it will address the Supreme Court’s decision in United States v. Bekins and some of the cases that have followed. Part III will dive into the issues raised by objectors to Detroit’s filing. While the objectors have raised at least thirteen distinct objections to the filing, this Note will concentrate on three. First, an effort will be made to demonstrate that contrary to some of the objections raised in the Detroit case, Chapter 9 is facially constitutional. Next, it will examine Michigan’s authorization of Detroit’s bankruptcy petition in accordance with § 109(c) of the Bankruptcy Code. It will argue that Public Act 436, the Michigan law that authorizes municipal bankruptcy and sets out the procedures that must be followed to file under Chapter 9, is constitutional and that the filing in this case complied with both federal and state law. It will also argue that Chapter 9 is constitutional as applied to Detroit, and that the protections present in Chapter 9 do more than enough to overcome any potential Tenth Amendment issue in Detroit’s filing. Finally, it will argue that, due to the Bankruptcy Code’s incorporation of state law property definitions, public sector pensions may not be reduced in Michigan by any means, including Chapter 9 bankruptcy