Company Flexibility, the Value of Management and Managerial Compensation

The variation in managerial compensation across countries and industries for firms of similar size is staggering. We analyze this phenomenon in a continuous time model of the firm, where the economic environment evolves stochastically over time and where changes to the firm operations are costly. The underlying idea is that managers in different countries and industries are compensated very differently, not necessarily because their skills differ substantially, but rather because the scope for management to add value to the firms varies substantially. If adjustment costs are low, or if the economic environment is relatively volatile, then the potential value-added from active management is larger. The positive relationship between economic environment volatility and the value of management suggests a real options interpretation of the manager: Active management can be viewed as a real option to make changes in the production plan. Our model shows that the higher the volatility of the economy, the larger the value of this real option. La variation dans les compensations des gestionnaires à travers les pays et les industries pour des compagnies de taille comparable est ahurissante. Nous analysons ce phénomène dans le cadre d'un modèle de compagnie en temps continu, dans lequel l'environnement économique évolue de manière stochastique et les changements dans le fonctionnement de la compagnie sont coûteux. L'idée sous-jacente est que les gestionnaires dans différents pays et industries sont rémunérés de manière très différente non pas parce que leurs compétences diffèrent de manière substantielle mais plutôt parce que la valeur ajoutée par la gestion diffère substantiellement. Si les coûts d'ajustement sont peu élevés ou si l'environnement économique est relativement volatile, alors le potentiel de valeur ajoutée par la gestion active est important. La relation positive entre la volatilité de l'environnement économique et la valeur de la gestion suggère une interprétation du gestionnaire en termes d'option réelle : la gestion active peut être vue comme une option réelle sur un changement dans le plan de production. Notre modèle montre que plus l'économie est volatile, plus l'option a de valeur.CEO Pay Variation, Production Adjustment Costs, Input Price Volatility, Real Options, Variation des rémunérations des directeurs d'entreprises, coûts d'ajustement de production, volatilité des prix des facteurs de production, options réelles

Homeownership as a Constraint on Asset Allocation

While home ownershipt provides a great deal of personal and social benefits, it poses a substantial constraint on individuals' asset allocation.housing, portfolio choice

Homeownership as a Constraint on Asset Allocation

While home ownership provides a great deal of personal and social benefits, it poses a substantial constraint on individuals' asset allocation.housing, portfolio choice

The Inevitability of Market-Wide Underpriced Risk

Lenders are frequently accused of mispricing the put option embedded in nonrecourse lending. Prior research shows one lender\u27s incentives to underprice. Here, we identify the conditions for a marketwide underpricing equilibrium. We demonstrate that, in a market with many players, given sufficient time, a race to the bottom and marketwide mispricing are inevitable. Underpricing occurs because bank managers and shareholders exploit mispriced deposit insurance. We show that the probability of the underpricing equilibrium increases with time since the previous market crash and that the more volatile the underlying asset market, the more likely it is subject to underpricing

Misaligned Incentives and Mortgage Lending in Asia

This paper provides a conceptual basis for the price discovery potential for tradable market instruments and specifically the development of mortgage securitization in Asia and the potential dangers of such markets. Nonetheless we argue for the potential importance of securitization in Asia because of its possible role in increasing transparency of the financial sector of Asian economies. We put forth a model explaining how misaligned incentives can lead to bank generated real estate crashes and macroeconomic instability, with or without securitization under certain circumstances. We examine the banking sectors performance in Asia compared to securitized real estate returns, to provide evidence on the contribution of misaligned incentives in the past. We discuss how the addition of liquid MBS could help to inoculate markets from the shocks arising from bank-financed mortgage lending. We conclude with a brief discussion of current MBS markets in Asia.tradable market instruments, price discovery, mortgage securitization, dangers, Transparency, MBS markets