Wolves in the Hen-House? The Consequences of Formal CEO Involvement in the Executive Pay-Setting Process

New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee, while others are excluded from the board altogether. Using 1997-2005 data, we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast, CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover, the greater the pay increment attributable to CEO involvement in the pay-setting process, the weaker is subsequent firm performance over one, three- and five-year periods.pay-performance sensitivity; compensation committee; CEO influence

CEO Presence on the Compensation Committee: A Puzzle

Conventional wisdom suggests that CEO membership of the compensation committee is an open invitation to rent extraction by self-serving executives. However using data from New Zealand - where CEO compensation committee membership is relatively common - we find that annual pay increments for CEOs with this apparent advantage averaged six percentage points less than those enjoyed by other CEOs during the 1997-2005 period. After controlling for variation in firm performance the difference is a still-sizeable four percentage points. This puzzling result cannot be explained by risk-return tradeoff considerations interaction with other governance variables selection bias or variable mis-measurement

Intra-Country Regulation of Share Markets: Does One Size Fit All?

A large body of evidence suggests that investor protection regulationassists the development of major stock exchanges but this leaves openthe question of whether or not the same level of regulation should beapplied to all centralised trading platforms. Allowing for regulatoryvariation permits a wider choice of investment opportunities for liquidity conscious investors lowers some firms' cost of capital and enhancesplatform competition while potentially negative spillover mechanismslack both theoretical credibility and empirical support. Overalluniformity in investor protection regulation seems designed to provide anexpensive solution to a doubtful problem

Can Ex Post Rates of Return Detect Monopoly Profits?

We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly profits. When replacement costs are used as entry and exit values the ex post IRR can in principle reveal something about monopoly profits. However since the ex post IRR is a noisy measure of ex ante monopoly profits it will be very difficult to reject the hypothesis given the sample periods typically available. The benchmarks typically used are market-determined and therefore only comparable to IRRs calculated using market values - a situation when the ex post IRR reveals nothing about monopoly profits anyway. Furthermore there is ample empirical and theoretical evidence that these benchmarks do not even represent fair rates of return

Wolves in the Hen-House? The Consequences of Formal CEO Involvement in the Executive Pay-Setting Process

New Zealand firms exhibit significant variation in the extent to which they formally involve CEOs in the executive pay-setting process: a considerable number sit on the compensation committee while others are excluded from the board altogether. Using 1997-2005 data we find that CEOs who sit on the compensation committee obtain generous annual pay rewards that have low sensitivity to poor performance shocks. By contrast CEOs who are not board members receive pay increments that have low mean and high sensitivity to firm performance. Moreover the greater the pay increment attributable to CEO involvement in the pay-setting process the weaker is subsequent firm performance over one three- and five-year periods

Techniques for Estimating the Fiscal Costs and Risks of Long-term Output-based Payments

Long-term commitments to make output-based payments for infrastructure can encourage private investors to provide socially valuable services. Making good decisions about such commitments is difficult however unless the government understands the fiscal costs and risks of possible commitments. Considering voucher schemes shadow tolls availability payments and access connection and consumption subsidies this paper considers measures of the fiscal risks of such commitments including the excess-payment probability and cash-flow-at-risk. Then it illustrates techniques based on modern finance theory for valuing payment commitments by taking account of the timing of payments and their risk-characteristics. Although the paper is inevitably mathematical it focuses on practical applications and shows how the techniques can be implemented in spreadsheets

Can Ex Post Rates of Return Detect Monopoly Profits?

We review the ability of the ex post internal rate of return (IRR) to detect monopoly profits. When market values are used as entry and exit values the ex post IRR simply reveals whether the firm did better or worse than the market expected at the entry date. It says nothing about monopoly profits. When replacement costs are used as entry and exit values the ex post IRR can in principle reveal something about monopoly profits. However since the ex post IRR is a noisy measure of ex ante monopoly profits it will be very difficult to reject the hypothesis given the sample periods typically available. The benchmarks typically used are market-determined and therefore only comparable to IRRs calculated using market values - a situation when the ex post IRR reveals nothing about monopoly profits anyway. Furthermore there is ample empirical and theoretical evidence that these benchmarks do not even represent fair rates of return

Payback Without Apology

When interest rates are uncertain the net-present-value threshold required to justify an irreversible investment is increasing in the length of a project's payback period. Thus slowpayback projects should face a higher hurdle than fast-payback projects just as investment folklore suggests. This result suggests that the widely disparaged use of payback for capital budgeting purposes can be an intuitive response to correctly perceived costs and benefits

A Primer on Information Markets

In 1988 the US Commodity Futures Trading Commission gave permission for the University of Iowa to begin operating the Iowa Electronic Market (IEM) thus ushering in the world's first information market (sometimes called a prediction market). Similar markets have subsequently appeared at the University of British Columbia and Vienna University of Technology. Outside the education sector firms such as Trade Exchange Network (tradesports.com) and a joint venture between Goldman Sachs and Deutsche Bank (economicderivatives.com) have set up public information markets while other firms such as Hewlett-Packard Lilly and Siemens have used information markets for internal purposes. Information markets are similar to standard derivatives markets in that they provide a mechanism for trading financial claims to future contingencies. However they differ in that first they are more accessible to small investors and second they offer markets on a wider range of events including politics sports legal weather business and entertainment. The increasing popularity of information markets reflects several factors. The university-based markets were initially designed to serve primarily as teaching and research tools by providing students and staff with the opportunity to study a trading environment that is more realistic than the typical laboratory setting but without the scale complexity and noise of real-world markets. More recently based on the proven ability of markets to gather and assimilate dispersed information the potential forecasting power of information markets has generated most interest.In this paper we describe the structure of some existing information marketsoutline their key features explain what they can be used for and assess theirpredictive ability. Finally we consider the possible advantages of setting up of an information market in New Zealand

Catching-Up in Broadband Regressions: Does Local Loop Unbundling Policy Lead to Material Increases in OECD Broadband Uptake?

Local loop unbundling has been widely promulgated by policy-makers as a significant factor stimulating broadband uptake and therefore an essential component of a developing 'information economy'. Whilst empirical evidence is sparse and at best equivocal in respect of a consistent positive and statistically significant effect a recent study commissioned and published by the OECD does find evidence of such effects. When correcting for omitted variables correlated data and methodological inconsistencies our analysis using the models and data from this report instead support the contention that LLU's contribution to the level of national broadband uptake is materially very small and not statistically significant. Continued advocacy for the policy as a stimulant for broadband uptake on the basis of the OECD-published report is misguided