Diagnostic systems in DEMO: engineering design issues

The diagnostic systems of DEMO that are mounted on or near the torus, whether intended for the monitoring and control functions of the engineering aspects or the physics behaviour of the machine, will have to be designed to suit the hostile nuclear environment. This will be necessary not just for their survival and correct functioning but also to satisfy the pertinent regulatory bodies, especially where any of them relate to machine protection or the prevention or mitigation of accidents foreseen in the safety case. This paper aims to indicate the more important of the reactor design considerations that are likely to apply to diagnostics for DEMO, drawn from experience on JET, the provisions in hand for ITER and modelling results for the wall erosion and neutron damage effects in DEMO.Comment: 8 page

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.

Credit Ratings as Coordination Mechanisms

In this paper, we provide a novel rationale for credit ratings. The rationale that we propose is that credit ratings can serve as a coordinating mechanism in situations where multiple equilibria can obtain. We show that credit ratings provide a "focal point" for firms and their investors. We explore the vital, but previously overlooked implicit contractual relationship between a credit rating agency and a firm. Credit ratings can help fix the desired equilibrium and as such play an economically meaningful role. Our model provides several empirical predictions and insights regarding the expected price impact of ratings changes, the discreteness in funding cost changes, and the effect of the focus of organizations on the efficacy of credit ratings.http://deepblue.lib.umich.edu/bitstream/2027.42/39841/3/wp457.pd