CEO Pensions: Disclosure, Managerial Power, and Optimal Contracting

CEOs often receive pensions that provide life annuities of up to 60% of their final salary plus bonus. I investigate the extent to which pensions are managerial rent extraction and/or the result of optimal contracting between CEOs and boards of directors. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits and whether pensions are associated with CEO power and/or contracting determinants. Overall, my results provide some support for both the managerial power and optimal contracting views of pensions. Economic contracting variables, however, appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used to extract rents, this practice appears to be limited. In addition, my results suggest that pension-based rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors’ ability to value pensions

Hedge Funds: Pricing Controls and the Smoothing of Self-Reported Returns

We investigate the extent to which hedge fund managers smooth self-reported returns. In contrast to prior research on the “anomalous” properties of hedge fund returns, we observe the mechanisms used to price the fund\u27s investment positions and report the fund\u27s performance to investors, thereby allowing us to differentiate between asset illiquidity and misreporting-based explanations. We find that funds using less verifiable pricing sources and funds that provide managers with greater discretion in pricing investment positions are more likely to have returns consistent with intentional smoothing. Traditional controls, however, such as removing the manager from the setting and reporting of the fund\u27s net asset value and the use of reputable auditors and administrators, are not associated with lower levels of smoothing. With respect to asset illiquidity versus misreporting, investment style and portfolio characteristics explain 14.0–24.3% of the variation in our smoothing measures, and pricing controls explain an additional 4.1–8.8%, suggesting that asset illiquidity is the major factor driving the anomalous properties of self-reported hedge fund returns

Do forecasts of bankruptcy cause bankruptcy? A machine learning sensitivity analysis

It is widely speculated that auditors' public forecasts of bankruptcy are, at least in part, self-fulfilling prophecies in the sense that they might actually cause bankruptcies that would not have otherwise occurred. This conjecture is hard to prove, however, because the strong association between bankruptcies and bankruptcy forecasts could simply indicate that auditors are skillful forecasters with unique access to highly predictive covariates. In this paper, we investigate the causal effect of bankruptcy forecasts on bankruptcy using nonparametric sensitivity analysis. We contrast our analysis with two alternative approaches: a linear bivariate probit model with an endogenous regressor, and a recently developed bound on risk ratios called E-values. Additionally, our machine learning approach incorporates a monotonicity constraint corresponding to the assumption that bankruptcy forecasts do not make bankruptcies less likely. Finally, a tree-based posterior summary of the treatment effect estimates allows us to explore which observable firm characteristics moderate the inducement effect.Comment: 26 pages, 12 figure

CEO Pensions: Disclosure, Managerial Power, and Optimal Contracting

CEOs often receive pensions that provide life annuities of up to 60% of their final salary plus bonus. I investigate the extent to which pensions are managerial rent extraction and/or the result of optimal contracting between CEOs and boards of directors. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits and whether pensions are associated with CEO power and/or contracting determinants. Overall, my results provide some support for both the managerial power and optimal contracting views of pensions. Economic contracting variables, however, appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used to extract rents, this practice appears to be limited. In addition, my results suggest that pension-based rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors’ ability to value pensions

Essays on CEO pensions

This paper investigates the disclosure and provision of defined benefit pensions to chief executive officers (CEOs) of publicly traded corporations. It consists of two essays. The first essay examines the extent that CEO pensions are the result of managerial rent extraction and/or optimal contracting between CEOs and boards of directors. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits and whether pensions are associated with CEO power and/or contracting determinants. My results provide some support for both the managerial power and optimal contracting views of pensions. Economic contracting variables, however, appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used to extract rents, this practice appears to be limited. In addition, my results suggest that pension-based rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors\u27 ability to value pensions. The second essay examines the extent that CEOs trade pay for pension benefits. I find that $1.00 of pension benefits is associated with a$0.48 decrease in CEO pay, measured as the sum of cash compensation and equity grants. Although the tradeoff estimate is significantly different from zero, it is also significantly less than the anticipated rate of dollar for dollar, especially for more powerful CEOs. This implies that the implicit price of pension benefits decreases with the CEO\u27s power, so pooling datasets on CEOs with varying degrees of power blurs the size of the pay-pension tradeoff. Overall, the two essays show that, in general, the disclosure and provision of CEO pension benefits is consistent with optimal contracting, but some CEOs extract rent through pension benefits. This rent extraction is, nevertheless, observable and takes the form of lower tradeoffs between pay and pension benefits

Essays on CEO pensions

This paper investigates the disclosure and provision of defined benefit pensions to chief executive officers (CEOs) of publicly traded corporations. It consists of two essays. The first essay examines the extent that CEO pensions are the result of managerial rent extraction and/or optimal contracting between CEOs and boards of directors. Specifically, I examine whether CEOs exploit limited disclosure requirements to hide and/or camouflage excess pension benefits and whether pensions are associated with CEO power and/or contracting determinants. My results provide some support for both the managerial power and optimal contracting views of pensions. Economic contracting variables, however, appear to explain pension benefit levels to a greater extent than measures of CEO power. This suggests that although pensions can be used to extract rents, this practice appears to be limited. In addition, my results suggest that pension-based rent extraction can be detected using public disclosures, implying that recent SEC changes in pension disclosure requirements are likely to have little effect on investors\u27 ability to value pensions. The second essay examines the extent that CEOs trade pay for pension benefits. I find that $1.00 of pension benefits is associated with a$0.48 decrease in CEO pay, measured as the sum of cash compensation and equity grants. Although the tradeoff estimate is significantly different from zero, it is also significantly less than the anticipated rate of dollar for dollar, especially for more powerful CEOs. This implies that the implicit price of pension benefits decreases with the CEO\u27s power, so pooling datasets on CEOs with varying degrees of power blurs the size of the pay-pension tradeoff. Overall, the two essays show that, in general, the disclosure and provision of CEO pension benefits is consistent with optimal contracting, but some CEOs extract rent through pension benefits. This rent extraction is, nevertheless, observable and takes the form of lower tradeoffs between pay and pension benefits