CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.mergers & acquisitions, CEO preferences, principal-agent problems

CEO Preferences and Acquisitions

This paper explores the impact of target CEOs’ retirement preferences on the incidence, the pricing, and the outcomes of takeover bids. Mergers frequently force target CEOs to retire early, and CEOs’ private merger costs are the forgone benefits of staying employed until the planned retirement date. Using retirement age as an instrument for CEOs’ private merger costs, we find strong evidence that target CEO preferences affect merger patterns. The likelihood of receiving a takeover bid increases sharply when target CEOs reach age 65. The probability of a bid is close to 4% per year for target CEOs below age 65 but increases to 6% for the retirement-age group, a 50% increase in the odds of receiving a bid. This increase in takeover activity appears discretely at the age-65 threshold, with no gradual increase as CEOs approach retirement age. Moreover, observed takeover premiums and target announcement returns are significantly lower when target CEOs are older than 65, reinforcing the conclusion that retirement-age CEOs are more willing to accept takeover offers. These results suggest that the preferences of target CEOs have first-order effects on both bidder and target behavior.

CEO Turnover and Relative Performance Evaluation

This paper examines whether CEOs are fired after bad firm performance caused by factors beyond their control. Standard economic theory predicts that corporate boards filter out exogenous industry and market shocks to firm performance when deciding on CEO retention. Using a new hand-collected sample of 1,590 CEO turnovers from 1993 to 2001, we document that CEOs are significantly more likely to be dismissed from their jobs after bad industry and bad market performance. A decline in the industry component of firm performance from its 75th to its 25th percentile increases the probability of a forced CEO turnover by approximately 50 percent. This finding is robust to controls for firm-specific performance. The result is at odds with the prior empirical literature which showed that corporate boards filter exogenous shocks from CEO dismissal decisions in samples from the 1970s and 1980s. Our findings suggest that the standard CEO turnover model is too simple to capture the empirical relation between performance and forced CEO turnovers, and we evaluate several extensions to the standard model.

Employee Sentiment and Stock Option Compensation

The use of equity-based compensation for employees in the lower ranks of large organizations is a puzzle for standard economic theory: undiversified employees should discount company equity heavily, and any positive incentive effects should be diminished by free rider problems. We analyze whether the popularity of option compensation for rank and file employees may be driven by employee optimism. We develop a model of optimal compensation policy for a firm faced with employees with positive or negative sentiment, and explicitly take into account that current and potential employees are able to purchase equity in the firm through the stock market. We show that employee optimism by itself is insufficient to make equity compensation optimal for the firm. Any behavioral explanation for equity compensation based on employee optimism requires two ingredients: first, employees need be over-optimistic about firm value, and second, firms must be able to extract part of the implied rents even though employees can purchase company equity in the market. Such rent extraction becomes feasible if employees prefer the non-traded compensation options offered by firms to the traded equity offered by the market, or if the traded equity is overvalued. We then provide empirical evidence confirming that firms use broad-based option compensation when boundedly rational employees are likely to be excessively optimistic about company stock, and when employees are likely to have a strict preference for options over stock.

Executive Compensation, Incentives, and Risk

This paper analyzes the link between equity-based compensation and created incentives by (1) deriving a measure of incentives suitable for both linear and non-linear compensation contracts, (2) analyzing the effect of risk on incentives, and (3) clarifying the role of the agent's private trading decisions in incentive creation. With option-based compensation contracts, the average pay-forperformance sensitivity is not an adequate measure of ex-ante incentives. Pay-for-performance covaries negatively with marginal utility and hence overstates the created incentives. Second, more noise in the performance measure implies that the manager is less certain about the effect of effort on performance, which in turn makes her less willing to exert effort. Finally, the private trading decisions by the manager have first-order effects on incentives. By reducing her holdings of the market asset, the manager achieves an effect similar to "indexing" the stock or option grant, making explicit indexation of the contract redundant

Conflicts of Interests Among Shareholders: The Case of Corporate Acquisitions

We identify important conflicts of interests among shareholders and examine their effects on corporate decisions. When a firm is considering an action that affects other firms in its shareholders' portfolios, shareholders with heterogeneous portfolios may disagree about whether to proceed. This effect is measurable and potentially large in the case of corporate acquisitions, where bidder shareholders with holdings in the target want management to maximize a weighted average of both firms' equity values. Empirically, we show that such cross-holdings are large for a significant group of institutional shareholders in the average acquisition and for a majority of institutional shareholders in a significant number of deals. We find evidence that managers consider cross-holdings when identifying potential targets and that they trade off cross-holdings with synergies when selecting them. Overall, we conclude that conflicts of interests among shareholders are sizeable and, at least in the case of acquisitions, affect managerial decisions.

Graduating to Success in Employment: How Social Media Can Aid College Students in the Job Search

This issue brief, the second in a series on social media in workforce development, explores how college career service centers can assist college students and recent college graduates in using social media as part of their job search

A Follow-up Study of Adult Home-economics-related Occupational Courses Conducted in South Dakota, 1968-1969

The objective of this study was to investigate the adult home economics related occupational courses conducted in South Dakota during the 1968-1969 school term. At the time this study was initiated, there were no specific criteria for adult occupational classes in vocational education for South Dakota. Classes were offered for persons who had already entered the labor market and who needed training or retraining to achieve stability or advancement in employment. Class enrollment, length of time for the course, and/or charge per hour depended on the objectives of the class and the type of class offered. Classes could have been conducted within or in addition to the working day of the students enrolled, and the course content could have been designed to develop both manipulative and technical knowledge. On the state level, according to Van Overschelde, state supervisor, Home Economies Service, Division of Vocational and Technical Education, Pierre, South Dakota, personnel have had no way of checking to see whether objectives were developed and accomplished in the adult occupational courses offered on the local levels. An Application for Approval for Vocational Adult Class, which specified that the course is designed to satisfy an occupational objective, is signed by the local director of adult education and the instructor of the course. When the occupational objectives of courses have been questioned, the directors of adult education have insisted that there are classes to train or retrain for an occupation. In summary, it is the belief of the writer that the foregoing statements substantiate the need to investigate the adult occupational courses which have been previously conducted in the state of South Dakota

Modelling bottom stress in depth-averaged flows

Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy at the Massachusetts Institute of Technology and the Woods Hole Oceanographic Institution May 1989The relationship between depth-averaged velocity and bottom stress for wind-driven flow in unstratified coastal waters is examined here. The adequacy of traditional linear and quadratic drag laws is addressed by comparison with a 2 1/2-D model. A 2 1/2-D model is one in which a simplified 1-D depth-resolving model (DRM) is used to provide an estimate of the relationship between the flow and bottom stress at each grid point of a depth-averaged model (DAM). Bottom stress information is passed from the DRM to the DAM in the form of drag tensor with two components: one which scales the flow and one which rotates it. This eliminates the problem of traditional drag laws requiring the flow and bottom stress to be collinear. In addition , the drag tensor field is updated periodically so that the relationship between the velocity and bottom stress can be time-dependent. However, simplifications in the 2 1/2-D model that render it computationally efficient also impose restrictions on the time-scale of resolvable processes. Basically, they must be much longer than the vertical diffusion time scale. Four progressively more complicated scenarios are investigated. The important factors governing the importance of bottom friction in each are found to be 1) non-dimensional surface Ekman depth, u.5/fh where u.s is the surface shear velocity, f is the Coriolis parameter and h is the water depth 2) the non-dimensional bottom roughness, zo/h where zo is the roughness length and 3) the angle between the wind stress and the shoreline. Each has significant influence on the drag law. The drag tensor magnitude, r, and the drag sensor angle, θ are functions of all three, while a drag tensor which scales with the square of the depth-averaged velocity has a magnitude, Cd, that only depends on zo/h. The choice of drag Jaw is found to significantly affect the response of a domain. Spin up times and phase relationships vary between models. In general, the 2 1/2-D model responds more quickly than either a constant r or constant Cd model. Steady-state responses are also affected. The two most significant results are that failure to account for θ in the drag law sometimes leads to substantial errors in estimating the sea surface height and to extremely poor resolution of cross-shore bottom stress. The latter implies that cross-shore near-bottom transport is essentially neglected by traditional DAMs.Financial support during my time in graduate school came from the Woods Hole Oceanographic Institution and grants from the National Science Foundation (OCE84-03249) and the Office of Naval Research (N00014-86-K-0061)

Selling Company Shares to Reluctant Employees: France Telecom's Experience

In 1997, France T‚l‚com, the state-owned French telephone company, went through a partial privatization. The government offered current and prior France T‚l‚com employees the opportunity to buy portfolios of shares with various combinations of discounts, required holding periods, leverage, tax treatment, and levels of downside protection. We adapt a neoclassical model of investment decision-making that takes into account firm-specific human capital and holding period restrictions to predict how employees might respond to the share offers. Using a database that tracks over 200,000 eligible participants, we analyze the employees' characteristics and their decisions whether to participate; how much to invest; and what form of stock alternatives they selected.